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answered is: out of what kind of transaction did the claim arise?
See id.
When determining the origin of the claim, the Court must
consider the issues, the nature and objectives of the potential
action, the defenses asserted, the purpose for the legal fees, the
background of the claim out of which the dispute arose, and “all
facts pertaining to the controversy.” Id. (citing Morgan’s Estate
v. Commissioner, 332 F.2d 144, 151 (5th Cir. 1964)); see Barr v.
Commissioner, T.C. Memo. 1989-420.
According to 6 Administration, Internal Revenue Manual (CCH)
sec. 331.1, at 38,063, Inspection’s purpose in conducting
investigations of allegations against employees of the Internal
Revenue Service is to determine facts and to report them to
management for a decision as to “whether the employee is suitable
for retention in the Service” and for other necessary action.
Inspection does not examine tax returns. See id. sec. 331.22.
Petitioners argue that “As a consequence of the
investigation, Charles Reynolds may have lost his law license” or
might have suffered a negative impact on his law practice or
professional reputation. The relevant question, however, asks
what the expense arose in connection with, not what consequences
might have resulted from the taxpayer’s failure to defeat the
claim. See United States v. Gilmore, supra at 48; Patch v.
Commissioner, T.C. Memo. 1980-11. The purpose of the legal fees
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