- 24 -
predominant purpose in defending and settling the suit. Woodward
v. Commissioner, supra at 577-578. In Woodward, the Supreme
Court rejected the primary purpose test, explaining that "A test
based upon the taxpayer's 'purpose' in undertaking or defending *
* * litigation would encourage resort to formalisms and
artificial distinctions." Id. at 577. The test for determining
deductibility of legal fees under section 162 is ordinarily an
objective one, looking to the "origin" or "character" of the
claim rather than the subjective "purpose" of the taxpayer in
pursuing it. Woodward v. Commissioner, supra at 577-578; United
States v. Gilmore, 372 U.S. 39, 49 (1963). The origin of the
claim is ascertained by analyzing the facts of the situation at
hand. United States v. Gilmore, supra at 47-48. We therefore
consider the issues involved, the nature of the litigation, the
defenses asserted, the background of the litigation, and all
facts pertinent to the controversy. Id.
Petitioners incurred the legal expenses in connection with
the Dell'Oca and the Knauss lawsuits.8 Petitioners argue that
the legal fees expended with respect to the Dell'Oca lawsuit
served to protect the current income of the Pescadero property.
8 Respondent concedes that petitioners have verified the
amounts claimed for legal expenses on Schedule F for 1991,
totaling $45,961. It appears that petitioners substantiated
legal fees of $115,938.37 and $35,837.33, respectively, for the
1992 and 1993 taxable years. In light of our ultimate
disposition of this issue, we do not apportion expenses between
the Dell'Oca and the Knauss lawsuits.
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