Patrick E. Catalano - Page 14




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          Issue 2.  Deductibility of Bankruptcy Fees                                  
               Petitioner contends that he may deduct the bankruptcy fees             
          he paid as ordinary and necessary business expenses under section           
          162 because his bankruptcy was caused by a combination of the               
          failure of MACAT and the lawsuits stemming from his legal                   
          practice.                                                                   
               Ordinary and necessary expenses paid or incurred during the            
          year in carrying on a trade or business are deductible under                
          section 162(a).  However, personal, living, or family expenses              
          are disallowed under section 262.  Whether an expense is a                  
          deductible trade or business expense, or a nondeductible                    
          personal, living, or family expense, depends on the origin of the           
          claims giving rise to the fees.  See United States v. Gilmore,              
          372 U.S. 39 (1963).                                                         


               13(...continued)                                                       
          posttrial brief.  Petitioner concedes that the limitation is                
          applicable in this case, but contends that this issue was raised            
          too late for it to be properly considered.  We disagree.  “[T]he            
          Commissioner does not necessarily forfeit his right to rely on a            
          theory by failing to raise it at the preferred times. ‘The basic            
          consideration is whether the taxpayer is surprised and                      
          disadvantaged * * * .’”   Stewart v. Commissioner, 714 F.2d 977,            
          986 (9th Cir. 1983) (quoting Commissioner v. Transport                      
          Manufacturing & Equip. Co., 478 F.2d 731, 736 (8th Cir. 1973)).             
          Petitioner was not surprised or disadvantaged by respondent’s               
          tardiness.  Respondent placed the deductibility of the mortgage             
          interest at issue when he denied petitioner’s deduction.                    
          Additionally, sec. 163(h) is an express statutory limitation that           
          is mechanically applied, and there are no underlying facts in               
          dispute.  See Levy v. Commissioner, T.C. Memo. 1991-646                     
          (permitting the IRS to challenge the taxpayer’s method of                   
          calculating its depreciation deduction even though issue was                
          first raised in the Commissioner’s posttrial brief).                        




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