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Profit or Loss From Business, attached to their 1994 Form 1040,
U.S. Individual Income Tax Return, petitioners deducted $82,971
for legal and professional services and $17,712 for consulting.
These amounts included costs for legal counsel, accounting work,
and the appraisal.
Respondent’s examination of petitioners’ 1994 return
commenced in January 1997. On March 3, 2000, respondent issued
petitioners a notice of deficiency determining that petitioners’
deductions for legal and consulting fees were not deductible
because the fees were incurred in connection with the
establishment of the purchase price of the Truckee Hotel.
OPINION
The issue for decision is whether legal and consulting fees
incurred in maintaining a lawsuit against a seller of property
are deductible as ordinary and necessary business expenses under
section 162.2 Respondent contends that the legal and consulting
fees must be capitalized pursuant to section 263(a) because they
arose out of, and were incurred in connection with, petitioners’
acquisition of the Truckee Hotel, a capital asset.3 Petitioners
argue that capitalization is not required because: (1) The fees
were postacquisition expenditures not related to the purchase of
2Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue.
3Petitioners do not dispute that the Truckee Hotel was a
capital asset.
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