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the facts and determining the nature of the transaction. Keller
St. Dev. Co. v. Commissioner, 688 F.2d 675, 681 (9th Cir. 1982),
affg. T.C. Memo. 1978-350.
Petitioners do not dispute that commissions are generally
payable to a realtor in connection with the sale of property.
Petitioners believed that the commission they owed the realtor
should have been reduced or entirely offset by damages due to
them from the realtor. Petitioners withheld the realtor’s
commission in an attempt to ensure that they would be compensated
for the loss allegedly caused by the realtor. A lawsuit ensued,
and petitioners incurred legal fees in defending their actions.
But for the sale of the Lakeshore property, petitioners
would not have incurred realtor’s commission. Had they not
disputed the realtor’s commission, petitioners would not have
incurred the legal fees at issue. Thus, the origin of the
realtor’s claim and the proximate cause of all of petitioners’
legal fees was the sale of the Lakeshore property, a capital
asset in the hands of petitioners. Therefore, we hold that
petitioners’ payment of legal fees in 2002 constituted a capital
expenditure.12
12Petitioners showed that they paid $21.64 for the purchase
of tax preparation software. This expense might be deductible
but for the fact that it appears to have been incurred and paid
in 2003. Therefore, respondent properly disallowed this amount
for 2002.
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