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William's lawsuit was a capital transaction, namely, the
redemption of his stock and the sale of certain real property to
petitioner, which William sought to rescind. This case thus
falls squarely within the rule that legal expenses incurred in
the acquisition of a capital asset must be capitalized if “the
origin of the claim litigated is in the process of acquisition
itself.” Woodward v. Commissioner, 397 U.S. 572, 577 (1970); see
also Wagner v. Commissioner, supra; Locke v. Commissioner, supra.
In defending against William's lawsuit, Lakeview sought to
preserve the terms of a completed capital transaction. Lakeview
was successful in that regard. The legal fees incurred by
Lakeview were thus expended to facilitate a capital transaction,
not to thwart it, and they produced benefits extending beyond the
taxable year, e.g., the removal of a shareholder deemed
troublesome by the surviving shareholder, the elimination of
conflicting views regarding management, etc. Requiring that
these legal fees be capitalized thus conforms to the guidelines
established by the Supreme Court in INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Because this case does not
involve fees expended to thwart a capital transaction or change
in ownership, the result we reach is not inconsistent with the
holding of the Seventh Circuit Court of Appeals in
A.E. Staley Manufacturing Co. v. Commissioner, supra. We
accordingly sustain respondent's determination that the legal
fees at issue are not deductible.
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