Robert Joseph Looby and M. Patricia Looby - Page 8

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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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