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Legal Expenses
During the years under consideration, petitioners paid legal
fees in connection with two lawsuits. Petitioner husband argues
that the litigation expenses incurred in connection with the
Dell'Oca and the Knauss lawsuits, respectively, were deductible
business expenses. In that regard, petitioners state that the
lawsuits were incurred to protect the income arising from the
farm activity. Conversely, respondent maintains that the origin
of the claim asserted in both lawsuits was in the nature of
defending or perfecting title to the Pescadero property and,
hence, was capital in nature. Specifically, respondent contends
that, under section 263, the legal expenses were not deductible
as ordinary and necessary expenses within the meaning of section
162 or 212 because these expenses were capital in nature.
Section 263 provides that no deduction is allowed for
capital expenditures. Legal expenses incurred to defend or
protect title to property or to acquire or dispose of a capital
asset are capital expenditures and are not deductible. Woodward
v. Commissioner, 397 U.S. 572, 575-576 (1970); Mosby v.
Commissioner, 86 T.C. 190, 196 (1986); Kasey v. Commissioner, 54
T.C. 1642, 1648-1649 (1970), affd. 457 F.2d 369 (9th Cir. 1972);
Midco Oil Corp. v. Commissioner, 20 T.C. 587, 591 (1953).
The appropriate test for determining whether petitioners may
deduct legal expenses is the origin of the claim, rather than the
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