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thus, the lawsuit essentially resulted in a redetermined purchase
price for the hotel. Overall, the evidence reflects that the
legal and consulting fees were incurred in connection with the
acquisition of the hotel and were directly related to the
purchase price.
Petitioners argue that the legal and consulting fees
originated from the misrepresentations made by Mr. Meglin as to
the expected average annual income of the hotel and were not
related to the purchase of the hotel. Petitioners represented
during their lawsuit against MHP and Mr. Meglin that they were
seeking damages to recover the difference between the purchase
price and the fair value of the hotel, as well as lost profits.
Petitioners ultimately settled their lawsuit in exchange for the
discharge of a portion of the amount owed under the purchase
agreement. The evidence indicates that the legal and consulting
fees incurred were a result of petitioners’ ultimate desire to
recover the amount they felt they had overpaid to purchase the
hotel. Thus, the origin of the claim in this case was the
purchase of the hotel.5
5If petitioners had sought and recovered damages solely on
the basis of lost profits incurred in reliance on Mr. Meglin’s
misrepresentations, then it appears that such damages might
constitute ordinary income and the legal fees incurred in
recovering the damages might not be directly related to the
acquisition of a capital asset. However, petitioners’ own
representations in the lawsuit against MHP and Mr. Meglin, as
well as their representations in this proceeding, indicate that
(continued...)
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