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Petitioners concede that their residence was not held for the
production of income but contend that the insurance policy should
be separated from the ownership of the residence and that, in
this context, their expenses to recover full replacement cost of
their residence fall within the purview of section 212(1).
The initial element in determining deductibility is the
application of the "origin of the claim" doctrine articulated by
the Supreme Court in United States v. Gilmore, 372 U.S. 39
(1963), and applied in Woodward v. Commissioner, 397 U.S. 572
(1970), and United States v. Hilton Hotels Corp., 397 U.S. 580
(1970).
We are not prepared to accept petitioners' argument that we
separate the insurance policy and the dispute thereunder from
petitioners' ownership of the residence, which was concededly a
capital asset not held for the production of income. The policy
was designed to reimburse petitioners against economic loss
arising from the occurrence of defined contingencies, represented
by the amount necessary to replace the residence. See, e.g.,
Allied Fidelity Corp. v. Commissioner, 66 T.C. 1068, 1074 (1976),
affd. 572 F.2d 1190 (7th Cir. 1978). But for the residence and
the fire, the insurance policy would be meaningless. Under such
circumstances, the residence is the origin of the situation that
caused petitioners to incur the legal fees. Compare Wagner v.
Commissioner, 78 T.C. 910 (1982), where we refused to separate a
lawsuit seeking adjustment of the purchase price of stock from
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