Dennis W. Stark - Page 26



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          78 T.C. 910, 918 (1982); Locke v. Commissioner, 65 T.C. 1004,               
          1011-1013 (1976), affd. 568 F.2d 663 (9th Cir. 1978).  In Locke             
          v. Commissioner, supra at 1011-1013, this Court found that legal            
          costs incurred in defending a fraud suit brought by the seller of           
          stock, subsequent to the consummation of the sale, were capital             
          expenditures.  See also Wagner v. Commissioner, supra (same                 
          result where purchaser brought the suit).  In Locke we held that            
          the origin of the claim was the fraud and concealment that                  
          allegedly took place during the sale of the stock, and therefore            
          the legal fees incurred were capital in nature since they related           
          to the acquisition of the stock, a capital asset.                           
               In the instant case, the essence of the lawsuit brought by             
          William against Lakeview and petitioner was an effort to rescind            
          the contract under which Lakeview redeemed William's stock.                 
          Consummation of that contract, the Redemption Agreement, was a              
          transaction involving the acquisition and disposition of a                  
          capital asset, stock.  Sec. 1221; Frederick Weisman Co. v.                  
          Commissioner, 97 T.C. 563, 572 (1991); Proskauer v. Commissioner,           
          T.C. Memo. 1983-395.  Because Lakeview incurred the legal fees in           
          defending claims that arose from a transaction involving the                
          acquisition of a capital asset, under the "origin-of-the-claim"             
          test the cost of such fees must be capitalized.9                            


               9 As noted previously, some portion of the legal fees may be           
          attributable to defending petitioner against William’s effort to            
          reclaim his interest in the Fence Property.  Any portion so                 
          attributable would be required to be capitalized because it arose           
          from a transaction involving the acquisition of interests in real           
                                                             (continued...)           



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