18
Respondent's argument fails for the following reasons.
Although the underlying transaction here did remotely involve a
capital transaction (the purchase of the ERG stock), the relation
of Peters to such transaction is too attenuated. Peters
allegedly gave inside information to Mick and Lounsbury, who then
profited from such information, and returned some of the profits
by the repayment of loans. Peters did not buy any stock;
furthermore, the allegations of the SEC were never proven or
admitted by Peters.
In Barrett v. Commissioner, supra, the taxpayer was sued by
the SEC, inter alia, for alleged inside trading; as part of a
settlement, he disgorged his profits. The case is
distinguishable because there the taxpayer was a buyer-broker,
and the underlying transaction was the purchase of certain
options by the taxpayer based on inside information. In our
case, Peters was not a buyer-broker, but was an investment
adviser; he did not personally buy the stock which gave rise to
the claim.
In the present case, Peters was alleged to have committed an
inside trade, and faced losing his license as an investment
adviser. There being nothing capital concerning the legal fees
(they were spent to protect Peters and his money-making
activity), we find that defending the SEC allegations was
proximately related to his business, and accordingly we hold that
the payment of the legal fees was ordinary in nature for him.
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