- 24 -
payment of legal expenses of $2,746; nevertheless, respondent
continued to maintain that no portion of this amount is
deductible. For his part, petitioner admitted that the deduction
related to expenses incurred in connection with the State court
litigation involving Mbaise Cultural Union (Cause No. 1999-47585
and Cause No. 2000-15808). See supra I.F.
Whether legal expenses are deductible as business expenses
pursuant to section 162(a) or are nondeductible pursuant to
section 262(a) depends on the origin and character of the claim
for which the expenses were incurred and whether the claim bears
a sufficient nexus to the taxpayer’s business activities. See
United States v. Gilmore, 372 U.S. 39 (1963). As the Supreme
Court stated: “the origin and character of the claim with respect
to which an expense was incurred, rather than its potential
consequences upon the fortunes of the taxpayer, is the
controlling basic test”. Id. at 49. In other words, “Litigation
expenses are deductible if the suit against the taxpayer ‘arises
in connection with’ or ‘proximately results from’ the taxpayer’s
business or profit-seeking activity.” O’Malley v. Commissioner,
91 T.C. 352, 362 (1988) (quoting United States v. Gilmore, supra
at 48). Thus, in order for petitioner’s legal expenses to be
deductible on his Schedule C for 2000, the origin of those legal
expenses must have been rooted in Americana Business Consultants,
his Schedule C business.
Having carefully read the complaint filed at Cause No. 1999-
47585 and the complaint filed at Cause No. 2000-15808, we are
Page: Previous 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 NextLast modified: May 25, 2011