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expenses which are ordinary and necessary for (1) the production
or collection of income, or (2) the management, conservation, or
maintenance of property held for the production of income. Sec.
212(1) and (2). Personal, living, and family expenses, on the
other hand, generally may not be deducted to any extent. Sec.
262(a).
Whether a legal expense is deductible under section 162(a)
or section 212, or nondeductible under section 262(a), is
contingent upon the origin and character of the underlying claim,
not on its potential consequences upon the fortunes of the
taxpayer. United States v. Gilmore, 372 U.S. 39 (1963); Peters,
Gamm, West & Vincent, Inc. v. Commissioner, T.C. Memo. 1996-186;
Lussy v. Commissioner, T.C. Memo. 1995-393, affd. without
published opinion 114 F.3d 1201 (11th Cir. 1997). This Court has
stated:
Quite plainly, the “origin-of-the-claim” rule does not
contemplate a mechanical search for the first in the chain
of events which led to the litigation but, rather, requires
an examination of all the facts. The inquiry is directed to
the ascertainment of the “kind of transaction” out of which
the litigation arose. Consideration must be given to the
issues involved, the nature and objectives of the
litigation, the defenses asserted, the purpose for which the
claimed deductions were expended, the background of the
litigation, and all the facts pertaining to the controversy.
[Citations and fn. ref. omitted].
Boagni v. Commissioner, 59 T.C. 708, 713 (1973).
Numerous documents related to petitioners’ legal expenses
were introduced into evidence in this case. The bulk of these
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Last modified: May 25, 2011