16
Commissioner, 58 T.C. 1055, 1058 (1972), affd. without published
opinion 474 F.2d 1345 (5th Cir. 1973). Petitioners have failed
to introduce any evidence that the payment of legal fees was
intended by PGWV to serve as compensation or salary to Mr.
Peters. Accordingly, PGWV is not allowed to deduct the payment
of the legal fees as compensation to Peters.
3. Whether a Portion of the Firm's Expense Was an Allowable
Deduction to Peters
Last, we must decide whether the expenses incurred were
deductible by Peters.6 Under section 212(1), individuals may
deduct all the ordinary and necessary expenses paid or incurred
during the tax year for the production or collection of income.
Our analysis is similar to that used for section 162(a), the
difference being that the profit-seeking or income-producing
activity need not amount to a trade or business. Johnson v.
Commissioner, 72 T.C. 340, 347 (1979). Accordingly, the expense
must meet four basic elements: (a) Payment of the legal fees
must be ordinary; (b) it must be necessary; (c) they must be paid
or incurred during the tax year by the taxpayer; and (d) the
expense must arise in connection with, or proximately result from
the taxpayer's profit-seeking activity. O'Malley v.
Commissioner, 91 T.C. 352, 361 (1988).
6 This issue was raised in this case by petitioners Peters.
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