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429 (7th Cir. 1970); Eisler v. Commissioner, 59 T.C. 634 (1973);
Old Town Corp. v. Commissioner, 37 T.C. 845 (1962); Oliver v.
Commissioner, T.C. Memo. 1997-84. A settlement payment has
business origin when the transaction or activity causing the
litigation originates in a trade or business; the potential
consequences of a failure to prosecute or defend the litigation
are secondary. See Woodward v. Commissioner, 397 U.S. 572, 577
(1970); United States v. Gilmore, 372 U.S. 39, 44-51 (1963);
Wells Fargo & Co. v. Commissioner, supra at 887; Anchor Coupling
Co. v. United States, supra at 433. The courts have created
three independent tests which are helpful to determine whether a
settlement payment with a business origin is deductible. These
tests are (1) whether the taxpayer/payor lacked confidence that
it would have prevailed in the lawsuit if it was not settled, (2)
whether the taxpayer/payor made the payment to avoid damages or
liability which might have resulted in the absence of the
settlement, and (3) whether the belief held by the taxpayer/payor
concerning the validity of the claim against him or her was
justified to the extent that a reasonable person in his or her
place would have thought that settlement was necessary. Old Town
Corp. v. Commissioner, supra at 858-859. An answer in the
affirmative to any of these tests tends to establish that the
settlement payment is deductible under section 162(a).
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