Jeffrey and Karen Winter - Page 11




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          purchase were capital expenditures because they arose out of, and           
          were incurred in connection with, acquisition of stock).  See               
          also Berry Petroleum Co. & Subs. v. Commissioner, supra (costs              
          incurred in defending lawsuit filed after merger were capital               
          expenditures because lawsuit had its origins in the process of              
          acquisition culminating in the merger); Wagner v. Commissioner,             
          78 T.C. 910 (1982) (legal fees incurred by seller of stock to               
          defend against lawsuit by purchaser were capital expenditures               
          because the origin of the claim was the sale); Redwood Empire               
          Sav. & Loan Association v. Commissioner, 68 T.C. 960 (1977)                 
          (amount paid to settle lawsuit brought by former owners of                  
          property, and legal fees incurred in connection therewith, were             
          capital expenditures), affd. 628 F.2d 516 (9th Cir. 1980).                  
               In the instant case, petitioners sought damages from MHP and           
          Mr. Meglin related to the purchase of the Truckee Hotel.  During            
          arbitration, petitioners sought specific damage amounts for the             
          difference between the purchase price and the actual value of the           
          hotel, lost profits, and renovation costs.  During the course of            
          litigation, petitioners had an appraisal done to determine the              
          fair market value of the property as of the date of purchase.               
          The appraisal indicated that petitioners paid a price                       
          substantially in excess of the fair market value.  As part of the           
          release and settlement agreement, Mr. Meglin agreed to reduce the           
          amount owed on the promissory note for the hotel by $271,473.95;            






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