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collection of income that is not includable in gross income12 are
not deductible under section 212. Sec. 1.212-1(e), Income Tax
Regs.
Origin and character of the claim
The Supreme Court, in United States v. Gilmore, 372 U.S. 39
(1963), held that the characterization of litigation costs as
"profit-seeking" or "personal" depends on whether or not the
claim arises in connection with the taxpayer's profit-seeking
activities. Further, the Court said: the origin and character of
the claim with respect to which an expense was incurred, rather
than its potential consequences upon the fortunes of the
taxpayer, is the controlling basic test of whether the expense
was 'business' or 'personal' and hence whether it is deductible
or not under [the predecessor to section 212] * * * [United
States v. Gilmore, supra at 49].
The "origin-of-the-claim" rule is not a mechanical search
for "the first in the chain of events which led to the litigation
but, rather, requires an examination of all the facts." Boagni
v. Commissioner, 59 T.C. 708, 713 (1973). The question to be
answered is, out of what kind of transaction did the litigation
arise. Id.
When determining the origin of the claim, the Court must
consider the issues, the nature and objectives of the action, the
defenses asserted, the purpose for the legal fees, the background
of the litigation and "all facts pertaining to the entire
controversy out of which the disputed expenses arose". Morgan's
12See sec. 102 (gross income does not include the value of
property received by gift, bequest, devise or inheritance).
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