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Petitioners’ reliance on Freeland v. Commissioner, T.C.
Memo. 1986-10, is misplaced. In that case, the taxpayers
incurred litigation expenses in a wrongful foreclosure action
resulting from the taxpayers’ declaration of default on a
promissory note, their exercise of an option to accelerate
installments, and their initiation of foreclosure proceedings.
Neither party to the litigation was seeking to adjust the
purchase price of the sales agreement; rather, the purpose of the
foreclosure action was to move title to the property from one
party to another. We found that the kind of transaction out of
which the litigation arose was the foreclosure action, not the
original acquisition of the property. However, because the
taxpayers ultimately were the successful bidders at the
foreclosure sale, we held that all of their litigation expenses
were attributable to the reacquisition of title and were not
currently deductible. The instant case is distinguishable
because petitioners incurred legal fees maintaining a lawsuit to
recover damages from Mr. Meglin for misrepresentations which
caused petitioners to pay an inflated price for the hotel.
5(...continued)
they sought and recovered damages to compensate them for the
difference between the purchase price of the hotel and the fair
market value of the hotel at the time of sale. Petitioners have
made no attempt in the instant case to allocate the $271,473.95
reduction in the amount owed under the promissory note among the
difference between purchase price and actual value of the hotel,
lost profits, and renovation costs.
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