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provision is section 212, which allows an individual to deduct
all of the ordinary and necessary expenses paid or incurred in:
(1) Producing income, (2) managing, conserving, or maintaining
property held for the production of income, or (3) determining,
collecting, or refunding a tax. Sections 162(a) and 212 are
considered in pari materia, except the income-producing activity
of section 162(a) is a trade or business whereas the income-
producing activity of section 212 is a pursuit of investing or
other profit-making that lacks the regularity and continuity of a
business. Guill v. Commissioner, 112 T.C. 325, 328 (1999). A
deduction under 162(a) reduces gross income to arrive at adjusted
gross income, while a deduction under section 212 reduces
adjusted gross income to arrive at taxable income.11 Id. Neither
party contends that the Lakeshore property was property used in a
trade or business under section 162.
A third possible treatment of litigation costs that may
confer a tax benefit is as a capital expenditure. See sec. 1221;
Woodward v. Commissioner, 397 U.S. 572, 575 (1970). Litigating
costs that are incurred in connection with the sale of a capital
asset are capital expenditures. Sec. 1211(b)(1). A capital
asset is property held by the taxpayer and not specifically
excluded from capital asset status by section 1221. Sec.
11The sec. 212 deduction is reported on Schedule A and is
subject to the 2-percent floor. See supra note 1.
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