- 26 -
We believe that the application of the “process of
acquisition” test is appropriate here.12 Both this Court and the
Court of Appeals for the Ninth Circuit applied the process of
acquisition test in Honodel v. Commissioner, 76 T.C. 351 (1981),
affd. 722 F.2d 1462 (9th Cir. 1984), to decide whether the
taxpayer/investors could deduct two types of fees which they paid
to an investment advisory and financial management company. The
first fee was a nonrefundable monthly retainer that the taxpayers
paid for investment counsel and advice. The amount of this fee
depended on the investor’s income level and the investor’s
financial planning, tax advice, and investment needs. The second
fee was a one-shot charge for services rendered in connection
with each investment acquired. The amount of this fee equaled a
specific percentage of the investment’s cost. We allowed the
taxpayers to deduct the monthly fees but required them to
capitalize the one-shot fees. We focused on whether the services
performed by the investment adviser were performed in the process
of acquisition or for investment advice. We concluded that the
services relating to the monthly fee did not arise out of that
process but that the services relating to the one-shot fee did.
See id. at 363-368. The Court of Appeals for the Ninth Circuit
agreed. See Honodel v. Commissioner, 722 F.2d 1462 (9th Cir.
12 This approach is consistent with a test suggested by the
amicus for FHLMC.
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