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rental property in Gaithersburg, Maryland. At trial and on
brief, petitioners argued that they should be allowed to deduct
those expenses if the Court should find, as we indeed did in
Wilson I, that the condemnation proceeds do not qualify for tax-
free treatment under section 1033.3 We agree with petitioners.
Ordinary and necessary attorney fees are generally
deductible subject to certain restrictions under section 67(a),
provided such expenses are paid or incurred during the taxable
year with respect to an issue involving income-producing
property. Sec. 212(1); sec. 1.212-1(l), Income Tax Regs. In
addition, a deduction is allowed for attorney's fees paid or
incurred during the taxable year in connection with the
determination, collection, or refund of any tax with respect to
3 Although this issue was not raised by petitioners in their
petition herein, it was argued by them at trial and on brief, and
the evidence is uncontested that they indeed incurred attorney
fees of $26,341 in 1989. Leahy v. Commissioner, 87 T.C. 56, 65
(1986); Estate of Horvath v. Commissioner, 59 T.C. 551, 555
(1973); Wynn v. Commissioner, T.C. Memo. 1996-415. Moreover, at
trial, respondent did not object to petitioners' assertion that
the attorneys' fees are at issue if "the Court should find that
[petitioners] didn't reinvest" the condemnation award pursuant to
sec. 1033.
Normally we will not consider an issue that was not pleaded,
but raised for the first time on brief. Rule 34(b)(4). However,
respondent did not object to petitioners' arguments, and we find
that based on the entire record, respondent was not surprised or
prejudiced by petitioners' position. Accordingly, we deem the
issue raised and tried by consent of the parties under Rule
41(b). Mills v. Commissioner, 399 F.2d 744, 748 (4th Cir. 1968)
affg. T.C. Memo. 1967-67; Leahy v. Commissioner, supra; Estate of
Horvath v. Commissioner, supra; Christensen v. Commissioner, T.C.
Memo. 1996-254.
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