-15-
Whether legal fees and expenses are deductible under section
162(a) or 212, or nondeductible under section 262(a) or 263,
depends on the origin of the underlying claim, not on its
potential effects on the fortunes of the taxpayer. See United
States v. Gilmore, 372 U.S. 39, 51 (1963) (holding that the
taxpayer was not entitled to deduct legal expenses incurred in
divorce proceedings in which his spouse sought a share of his
controlling interests in three corporations because his spouse’s
claims stemmed from the marital relationship, not from income-
producing activity); see also Woodward v. Commissioner, supra at
577-578; Redwood Empire Sav. & Loan Assn. v. Commissioner, 628
F.2d 516, 520 (9th Cir. 1980), affg. 68 T.C. 960, 976-979 (1977);
Madden v. Commissioner, supra at 1151;5 Reed v. Commissioner, 55
T.C. 32, 39 (1970).
Legal expenses and settlement costs incurred in defending
against claims that would injure or destroy a business are
ordinary and necessary business expenses. Commissioner v.
Heininger, 320 U.S. 467, 471-472 (1943); N. Am. Inv. Co. v.
Commissioner, 24 B.T.A. 419, 420 (1931).
Litigation may be rooted in both the defense or perfection
of title (nondeductible expenditures) and in the management of a
5 In Madden v. Commissioner, 514 F.2d 1149 (9th Cir. 1975),
revg. 57 T.C. 513 (1972), the Court of Appeals for the Ninth
Circuit, the court to which an appeal in this case would lie,
applied the origin-of-the-claim test to determine whether
litigation costs are currently deductible or capital in nature.
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