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1221(a). The regulations under section 1221 provide that
“Property held for the production of income, but not used in a
trade or business of the taxpayer, is not excluded from the term
‘capital assets’”. Sec. 1.1221-1(b), Income Tax Regs.
The Lakeshore property was a capital asset in petitioners’
hands, and petitioners properly reported the gain on the sale of
the Lakeshore property as capital gain in 2001. Petitioners’
expenditures for the legal fees and expenses arose in connection
with the disposition of the Lakeshore property, rather than with
its conservation or maintenance, and are therefore capital
expenditures.
Respondent contends that the legal costs borne by
petitioners did not relate to the sale of the Lakeshore property
but rather, at least in part, to petitioners’ counterclaim
against the realtor for damages with respect to petitioners’
personal property. Consequently, according to respondent, the
legal costs are personal items which under section 262 are not
deductible.
The proper characterization of legal fees and expenses is
governed by the “origin of the claim” test. Woodward v.
Commissioner, supra at 577-578. The object of the “origin of the
claim” test is to find the transaction or activity from which the
taxable event proximately resulted. United States v. Gilmore,
372 U.S. 39, 47 (1963). The origin is determined by analyzing
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