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Litigation expenses may be deductible under either section
162 or section 212. Guill v. Commissioner, 112 T.C. 325, 328
(1999); Noons v. Commissioner, T.C. Memo. 2000-106. Section
162(a) allows a deduction for all ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade
or business. Under section 212, a taxpayer may deduct all the
ordinary and necessary expenses paid or incurred during the
taxable year for the production or collection of income, if such
income will be taxable when received. Andrews v. Commissioner,
T.C. Memo. 1992-668; Orr v. Commissioner, T.C. Memo. 1992-566;
sec. 1.212-1(a), Income Tax Regs. Section 265(a)(1) provides
that no deduction is allowable for expenses allocable to income
which is wholly exempt from income tax.
In the lawsuit, petitioners "claim that they suffered
personal injuries and property damage". Land v. United States,
35 Fed. Cl. 345, 346 (1996), affd. 37 Fed. Cl. 231 (1997). Under
section 104(a)(2), gross income does not include "the amount of
any damages received (whether by suit or agreement * * *) on
account of personal injuries or sickness". Any damages that
petitioners potentially could have received on account of their
personal injuries would not be taxable under section 104.
Therefore, the expenses associated with the personal injury
portion of their suit are not deductible. Sec. 265.
Petitioners provided no allocation of the fees they paid.
Nevertheless, we recognize that some part of the legal fees was
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