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that an expenditure be capitalized when it (1) creates a separate
and distinct asset, (2) produces a significant future benefit,
or (3) is incurred “in connection with” the acquisition of a
capital asset. See also Commissioner v. Idaho Power Co., 418
U.S. 1, 13 (1974); Woodward v. Commissioner, 397 U.S. 572, 575-
576 (1970). If any of the three conditions is met, an expense
may not be deducted and must be capitalized.
Here, the correct legal framework in determining whether the
disputed legal fees are deductible is the origin of the claim
test. United States v. Gilmore, 372 U.S. 39 (1963). In order
for these fees to be deductible, the origin of the claim in the
underlying action must be proximately related to petitioner’s
trade or business. Kornhauser v. United States, 276 U.S. 145
(1928). The origin of the claim test is factual, and the factors
to be considered include: (1) Allegations in the complaint,
(2) the legal issues involved, (3) the nature and objectives of
the litigation, (4) the defenses asserted, (5) the purposes for
which the amounts claimed as deductible were expended, and
(6) the background of litigation and all facts pertaining to the
controversy. Boagni v. Commissioner, 59 T.C. 708, 713 (1973).
The first disputed fee, $770, relates to Oakland 3. The
complaint by Pomeroy in this case alleged that petitioner, in his
capacity as president of H.K. Peach, had seized control of the
corporation and had operated the corporation “as his private
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