John H. and Mary E. Douglas - Page 11

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               Legal expenses are deductible under section 162(a) as                  
          ordinary and necessary business expenses if the litigation is               
          directly connected with, or proximately related to, the                     
          taxpayer's business.  Bingham's Trust v. Commissioner, 325 U.S.             
          365, 373-374 (1945); Kornhauser v. United States, 276 U.S. 145,             
          153 (1928); Rafter v. Commissioner, 60 T.C. 1, 8 (1973), affd.              
          without published opinion 489 F.2d 752 (2d Cir. 1974).                      
               Petitioner claims that he was engaged in the business of               
          selling real estate as part of his renovation, management, and              
          rental activities.  While respondent concedes that petitioner               
          participated in the purchase, renovation, management, rental, and           
          sale of property, respondent contends that petitioner was not in            
          the business of selling real estate during the years in issue.              
          Rather, respondent characterizes petitioner's activities as                 
          investment activity.                                                        
               We conclude that petitioner was not engaged in the business            
          of selling real estate during 1992 and 1993.  Although petitioner           
          purchased 11 properties during the period 1982 through 1989, he             
          renovated 7 of the properties and sold only 2 of the properties,            
          1 in 1989 and 1 in 1990.  Thus, petitioner's sales activity was             
          neither regular nor continuous.  See Polakis v. Commissioner, 91            
          T.C. 660, 670-672 (1988).  Further, petitioner's Schedules C for            
          tax years 1992 and 1993 do not reflect any income; rather,                  
          petitioner reported the rental income and expenses from his                 
          properties on Schedule E.  Petitioners reported the gain on the             

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