Wallace R. Noel and Robinette Noel - Page 20

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               Petitioner paid $300,000 to his lawyers upon the settlement            
          of claims against PepsiCo and increased the basis of his PMI                
          stock.  Again, respondent, in her notice of deficiency, allowed             
          petitioner these fees as a miscellaneous itemized deduction.  For           
          the reasons set out below, we hold that $219,000 of these fees is           
          a proper addition to the basis of petitioner's stock, $54,000 of            
          the fees is deductible as a miscellaneous itemized deduction, and           
          $27,000 of the fees is nondeductible.  Section 265 precludes a              
          deduction for legal expenses attributable to a class of income              
          that is exempt from taxation.  Section 1.265-1(c), Income Tax               
          Regs., provides as follows:                                                 
               Expenses and amounts otherwise allowable which are                     
               directly allocable to any class or classes of exempt                   
               income shall be allocated thereto; and expenses and                    
               amounts directly allocable to any class or classes of                  
               nonexempt income shall be allocated thereto.  If an                    
               expense or amount otherwise allowable is indirectly                    
               allocable to both a class of nonexempt income and a                    
               class of exempt income, a reasonable proportion thereof                
               determined in the light of all the facts and circum-                   
               stances in each case shall be allocated to each.                       
               Ordinarily, we allocate the legal expenses in the same                 
          proportion as the settlement payment.  See Stocks v. Commis-                
          sioner, supra at 18; Metzger v. Commissioner, 88 T.C. 834, 860              
          (1987), affd. 845 F.2d 1013 (3d Cir. 1988); Church v. Commis-               
          sioner, supra at 1110-1111.  But see Eisler v. Commissioner,                
          supra at 642.  Based on the evidence, a proportionate allocation            
          is appropriate in this case.  We have held that 73 percent of the           
          settlement payment was paid for petitioner's stock, 18 percent              

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