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1992, which they claimed as a miscellaneous deduction on their
1992 return.
At the outset, we note that we have no direct evidence that
petitioners realized taxable gain, i.e., an excess of the
insurance proceeds over cost, from their receipt of replacement
cost under the insurance policy. Sec. 1033(a)(2); see Central
Tablet Manufacturing Co. v. United States, 417 U.S. 673, 676
(1974); Tobias v. Commissioner, 40 T.C. 84, 95 (1963). However,
neither party has suggested that a gain is not involved herein,
and we think that the existence of a gain is a permissible
premise upon which to base our analysis and decision herein.1
The issue before us is whether petitioners are entitled to
deduct the $25,000 legal fees under section 212(1) which provides
in pertinent part:
In the case of an individual, there shall be
allowed as a deduction all the ordinary and necessary
expenses paid or incurred during the taxable year--
(1) for the production or collection of
income;
Respondent contends that petitioners' home was not held for
the production of income and, thus, the legal fees incurred by
petitioners were incurred to recover a loss, not for the
production of income, and are therefore not deductible.
1 No gain was reported on petitioners' 1992 return based on the
payment received in that year. It appears that petitioners were
waiting until the expiration of the applicable period in which to
replace the residence without current recognition of gain. See
sec. 1033(a)(2).
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