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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).
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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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