                        T.C. Memo. 1997-497



                      UNITED STATES TAX COURT



    JEFFREY A. GLASSMAN and MARY K. GLASSMAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No.   27001-95.                Filed November 5, 1997.



     Terrence J. Moore, for petitioner.

     Mary Tseng Klaasen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   Respondent determined a deficiency of

$17,047.96 in petitioners' 1992 Federal income tax.    Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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After concessions, the issues for decision are whether

petitioners' expenditures for legal services, which respondent

agrees are deductible pursuant to section 212, are subject to

section 67(a), and alternatively whether such expenditures are

capital expenditures.   We hold that petitioners' section 212

deduction is subject to section 67(a) and that their expenditures

are not capital expenditures.

                         FINDINGS OF FACT

     The parties submitted this case fully stipulated pursuant to

Rule 122.   At the time Jeffrey and Mary Glassman filed their

petition, they resided in Lake Forest, California.

     In 1954, Mary Glassman married James M. Oddino.   During

their marriage, Mr. Oddino was employed by the Hughes Aircraft

Company and participated in the Hughes Non-Bargaining Retirement

Plan (Hughes Plan).   On January 19, 1983, the Superior Court of

the State of California, County of Los Angeles (Superior Court),

issued an interlocutory judgment that dissolved the marriage and

awarded Mrs. Glassman a portion of Mr. Oddino's retirement

benefits.   On March 24, 1989, the Superior Court issued a

Qualified Domestic Relations Order (QDRO) that modified and

clarified the interlocutory judgment.   The QDRO directed the

Hughes Plan to:   (1) Pay Mrs. Glassman 36.6231 percent of Mr.

Oddino's "accrued benefit[s] as of April 1, 1988"; (2) convert

Mrs. Glassman's payout option from a lifetime annuity to an
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annuity with a 5-year payout period (i.e., payable in 60 monthly

installments); and (3) commence payments on "April 1, 1988, or as

soon thereafter as practical."

     The Hughes Plan administrator (administrator) calculated Mr.

Oddino's "accrued benefit[s] as of April 1, 1988."     Under the

plan, "accrued benefits" are a function of the employee's age

and, in certain instances, years of service.     In general,

employees who retire at age 65 or older receive full retirement

benefits.   Employees who retire between the ages of 55 and 64

receive actuarially reduced benefits.     Under the "Rule of 75,"

however, employees between the ages of 55 and 64 can retire and

receive full, unreduced benefits if the sum of their age and

years of service equals or exceeds 75.     On April 1, 1988, the

date used to calculate benefits pursuant to the QDRO, Mr. Oddino

had not yet retired, was 55 years old, and had worked for Hughes

Aircraft for approximately 27 years.     In calculating Mrs.

Glassman's community share, the administrator did not apply the

Rule of 75.   Instead, the administrator calculated the accrued

benefits in accordance with the general rule for retirees between

the ages of 55 and 64.   The administrator determined that Mrs.

Glassman was entitled to receive sixty $1,563.70 monthly

installments, and on March 1, 1990, the administrator commenced

payments.
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     Mrs. Glassman objected to the administrator's determination,

and on July 11, 1991, filed a Motion to Show Cause, in which she

alleged that the administrator (1) improperly calculated the

amount of accrued benefits and (2) unreasonably delayed payments.

She contended that the administrator should have applied the Rule

of 75 because, on the date specified in the QDRO, Mr. Oddino met

the age and service requirements.   She asked the court to

recalculate her benefits and award interest, attorney's fees, and

costs.   The Hughes Plan responded that:   (1) California law and

the Employment Retirement Income Security Act prohibit the plan

from using the Rule of 75 to calculate Mrs. Glassman's share of

Mr. Oddino's benefits; and (2) the Rule of 75 is an incentive for

early retirement that is applicable only if the employee actually

retires.

     On May 3, 1992, the Superior Court denied Mrs. Glassman's

motion and held that the administrator had not erred in its

calculation.   The California Court of Appeals, Second Appellate

District, reversed the lower court's holding and, on July 24,

1996, entered judgment for Mrs. Glassman.   The Hughes Plan filed

a timely appeal with the California Supreme Court, where the

action was pending on the date we held trial.

     Petitioners, on their 1992 joint tax return, claimed an

$80,468.31 itemized deduction for attorney's fees paid in

connection with their litigation against the Hughes Plan.    In the
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notice of deficiency, respondent determined that the deduction

was subject to section 67(a) and that petitioners were subject to

the alternative minimum tax.

                               OPINION

     The parties agree that if petitioners' payments relating to

attorney's fees are not capital expenditures, such payments are

deductible pursuant to section 212.      Petitioners' primary

contention is that their section 212 deduction for attorney's

fees is not subject to section 67(a), which allows miscellaneous

itemized deductions only to the extent that such deductions

exceed 2 percent of adjusted gross income (the 2-percent floor).

Respondent, however, contends that the deduction is subject to

the 2-percent floor.   We agree with respondent.     Section 67(a)

expressly permits miscellaneous itemized deductions only to the

extent such deductions exceed 2 percent of adjusted gross income.

The section 212 deduction is a miscellaneous itemized deduction

that is subject to this limitation.      Alexander v. Commissioner,

72 F.3d 938, 946 (1st Cir. 1995), affg. T.C. Memo. 1995-51; secs.

63(d), 67(a) and (b); sec. 1.67-1T(a)(1)(ii), Temporary Income

Tax Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988).      Therefore,

petitioners' primary contention is meritless.

     In the alternative, petitioners contend that their payments

are capital expenditures that increase the basis of Mrs.

Glassman's interest in Mr. Oddino's pension benefits.      Pursuant
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to this theory, petitioners contend that Mrs. Glassman's interest

is a capital asset that Mrs. Glassman sold to the Hughes Plan in

exchange for 60 monthly payments and that her basis offset funds

she received from the plan.   For the reasons set forth below we

conclude that the payments are not capital expenditures.

     Generally, expenses must be capitalized if they are paid to

acquire, dispose, defend, perfect title to, or improve property.

Sec. 263(a); sec. 1.212-1(k), Income Tax Regs.   Petitioners

contend that, under the origin of the claim test, their payments

are capital expenditures.   Because this case is appealable to the

Court of Appeals for the Ninth Circuit, we must apply the Ninth

Circuit's version of the origin of the claim test.   Golsen v.

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 955 (10th Cir.

1971).   In Keller St. Dev. Co. v. Commissioner, 688 F.2d 675, 678

(9th Cir. 1982), affg. T.C. Memo. 1978-350, the Court of Appeals

for the Ninth Circuit stated that the origin of the claim test is

a 2-step process.   Cf. Boagni v. Commissioner, 59 T.C. 708 (1973)

(applying a list of factors).

     The first step requires us to identify the transaction or

event from which the claim originated (i.e., the event that

prompted the cause of action and formed the basis of the suit).

Keller St. Dev. Co. v. Commissioner, supra at 681.   Mrs.

Glassman's claim against the Hughes Plan originated from the

administrator's calculation and payment of her community share of
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retirement benefits.   The administrator's actions prompted Mrs.

Glassman to file her claim and formed the basis of her cause of

action.

     The second step requires us to characterize the transaction

that we identified in the first step.   Id. at 678.   Respondent

contends that the taxable portion of the income stream from the

Hughes Plan is ordinary income.   See secs. 61(a)(11), 72, 402(a);

Eatinger v. Commissioner, T.C. Memo. 1990-310.   Indeed,

petitioners consistently reported the taxable portion of all

payments from the plan as ordinary income.   We conclude that Mrs.

Glassman's claim relates to the calculation of benefits under the

Hughes Plan, not to a "capital transaction" (e.g., the

acquisition, disposition, defense, or protection of title to

property).   Therefore, petitioners' expenditures are not capital

expenditures.   See Dye v. United States, 121 F.3d 1399, 1405

(10th Cir. 1997) (stating that expenditures for attorney's fees

are not capital expenditures if incurred to secure taxable,

ordinary income); see also Leonard v. Commissioner, 94 F.3d 523,

526 (9th Cir. 1996); Parker v. United States, 215 Ct. Cl. 773,

573 F.2d 42, 51 (1978); cf. Pierce Estates, Inc. v. Commissioner,

3 T.C. 875, 892-893 (1944)(holding that expenditures for

attorney's fees are not capital expenditures where incurred in

litigation over the proper method of calculating how much income
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petitioners were entitled to pursuant to their interest in an oil

lease).

     All other arguments raised by the parties are either

irrelevant, moot, or without merit.

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.
