Dennis W. Stark - Page 20



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          and accordingly are deductible as ordinary and necessary business           
          expenses under the reasoning of A.E. Staley Manufacturing Co. v.            
          Commissioner, 119 F.3d 482, 491 (7th Cir. 1997), revg. 105 T.C.             
          166 (1995), and Federated Dept. Stores, Inc. v. Commissioner, 171           
          Bankr. 603 (S.D. Ohio 1994).  Petitioner further contends that to           
          the extent any personal benefit was conferred on him, the legal             
          expenses are nonetheless deductible by Lakeview because the                 
          corporation was a principal defendant in the lawsuit and its                
          assets were directly threatened, citing Kopp's Co. v.                       
          Commissioner, 636 F.2d 59 (4th Cir. 1980).                                  
               We disagree with both of the analyses offered by the                   
          parties, but hold for respondent for different reasons.                     
               The Supreme Court has held that the determination of whether           
          a litigation expense is a deductible business expense or a                  
          nondeductible personal one depends upon "the origin and character           
          of the claim" being litigated.  United States v. Gilmore, supra             
          at 49.  In that case, the taxpayer sought to deduct the legal               
          expenses he incurred in a divorce proceeding, on the grounds that           
          he was seeking to conserve income-producing property; namely, his           
          controlling stock interests in certain automobile dealerships,              
          against his wife's claim to all or part of them under community             
          property laws.  Applying the "origin of the claim" test, the                
          Court concluded that the claim arose entirely from the marital              
          relationship, not from any income-producing activity, and                   
          consequently the expenses were nondeductible personal ones.  Id.            





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