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In the case of an individual, there shall be
allowed as a deduction all the ordinary and necessary
expenses paid or incurred during the taxable year--
(1) for the production or collection of
income;
(2) for the management, conservation or
maintenance of property held for the
production of income; or
(3) in connection with the
determination, collection, or refund of any
tax.
It is petitioner's contention that his expenditure of legal
fees in the State court litigation was the first step in a quest
for the production or collection of income and in connection with
the determination, collection, or refund of a tax. The focus of
the Court will therefore be on the first and third paragraphs of
section 212.
A taxpayer may not, under section 212, deduct legal fees
that are personal expenses. Sec. 262(a). Legal fees incurred in
connection with the management, conservation, or maintenance of
property held for use as a residence by the taxpayer are not
deductible. Sec. 1.212-1(h), Income Tax Regs.
The Supreme Court, in United States v. Gilmore, 372 U.S. 39
(1963), held that the characterization of legal expenses depends
on the activities from which the claim arises for which the
expenses were incurred. The Court said: "The origin and
character of the claim with respect to which an expense was
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Last modified: May 25, 2011