- 7 -
or a capital outlay and not whether a payment is a
deductible business expense. We disagree. Although
the two questions are admittedly different,
substantially the same problems arise in each
determination. Thus in both cases the court must
determine the tax consequences of monetary outlays made
in connection with contesting a claim on the taxpayer's
assets. * * *
To determine the origin of the claim, the Court must consider
"the issues involved, the nature and objectives of the
litigation, the defenses asserted, the purpose for which the
claimed deductions were expended, the background of the
litigation, and all facts pertaining to the controversy." Boagni
v. Commissioner, 59 T.C. 708, 713 (1973)); Saltzman v.
Commissioner, T.C. Memo. 1994-641.
United States v. Wheeler, 311 F.2d 60 (5th Cir. 1962), is
instructive here. The taxpayer owned controlling stock interests
in 3 corporations. He first entered into negotiations to sell
the stock to an individual named Cage, but upon learning
(mistakenly) that Cage had lost interest, the taxpayer entered
into a sales agreement with Ainsworth. Id. at 61. After signing
the latter contract, the taxpayer discovered that Cage was still
interested in purchasing the stock. The taxpayer also feared
that "Ainsworth would probably 'bleed' the corporate assets" dry.
To prevent that, the taxpayer refused to sell his stock.
Ainsworth sued, alleging breach of contract and requesting
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