                            T.C. Memo. 1997-370



                          UNITED STATES TAX COURT



               MERRELL AND FRANCINE VANNIER, Petitioners v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent


       Docket No. 18536-95.                       Filed August 13, 1997.


       Merrell Vannier, pro se.


       Gregory J. Powers, for respondent.


                            MEMORANDUM OPINION


       NAMEROFF, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182.       Respondent determined a deficiency in petitioners’ 1991



       1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -


Federal income tax in the amount of $1,126.    References to

petitioner are to Merrell Vannier.

     The sole issue for decision is whether petitioners are

entitled to deduct $5,6722 in legal expenses incurred as a result

of petitioner’s attempt to gain admission to the State Bar of

California (California Bar).    Respondent has agreed that

petitioner paid the above amount in legal fees and costs.

                             Background

     Some of the facts have been stipulated, and they are so

found.   The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time they filed

their petition, petitioners resided in La Crescenta, California.

     Petitioner obtained a bachelor’s degree in electrical

engineering in 1971 and a law degree in 1975, both from the

University of Missouri.   Petitioner sat for and passed the

Missouri bar exam and was admitted to the Missouri State Bar

(Missouri Bar) in 1975.   In addition, petitioner sat for and

passed the Florida bar exam and was admitted to the Florida State

Bar (Florida Bar) in 1976.    Petitioner practiced law in Florida

for approximately 1 year.    In 1977, petitioner returned to

Missouri and practiced law in the St. Louis area until 1979.

Petitioner eventually moved to California during 1979 and has



     2
         Subject to the 2% floor.   Sec. 67.
                                - 3 -


resided there ever since.    Petitioner never became licensed to

practice law in California.

       In 1980, the Florida Bar filed charges against petitioner

for conduct occurring during 1976.      The crux of the Florida Bar’s

allegations was that petitioner acted as “an undercover agent for

the Church of Scientology * * * [and] used his position as a

member of The Florida Bar for purposes contrary to the interests

of his clients and to his oath as an attorney and to the Code of

Professional Responsibility.”     The Florida Bar v. Vannier, 498

So. 2d 896, 897 (Fla. 1986).

       In 1983, petitioner applied for admission to the California

Bar.    During 1984, petitioner sat for and passed the California

Bar exam.    As part of the application to the California Bar,

petitioner was required to undergo a moral character review

conducted by the California Committee of Bar Examiners (the

Committee).    By this time, the Florida Bar had not yet taken

action on the 1980 bar charges.    Consequently, the Committee

refused to make a determination on petitioner’s moral character

until the Florida Bar resolved those charges.     The Committee,

therefore, placed petitioner’s application on hold.

       During 1986, a disciplinary proceeding took place to rule on

the merits of the Florida Bar’s 1980 charges.     The referee

overseeing the disciplinary proceeding recommended that

petitioner be disbarred.    On November 26, 1986, the Supreme Court
                                - 4 -


of Florida, by way of a published opinion, approved the referee’s

findings and ordered petitioner disbarred as of that date.     See

The Florida Bar v. Vannier, supra.      Soon after, the State of

Missouri, relying on the Florida ruling, disbarred petitioner.

     In January 1987, upon learning of the results of the Florida

decision, the Committee renewed its own moral character

investigation.    Ultimately, petitioner was denied admission to

the California Bar based on facts found in the Florida ruling.

     Around this time, petitioner and an acquaintance, Norman

Taylor (Mr. Taylor), envisioned starting a public interest law

firm that would assist consumers in securing refunds or

replacement vehicles for their defective automobiles pursuant to

Federal and State “lemon laws”.    Petitioner believed that

establishing a firm specializing in lemon law would be a good

idea because these laws were not being enforced at that time.        In

1988, petitioner and Mr. Taylor co-founded the Law Offices of

Norman Taylor (Taylor firm).   The Taylor firm became very

successful at bringing about “results and reform” in lemon law.

     Petitioner worked at the Taylor firm as a full-time

employee.   Petitioner served as the firm’s Executive Director and

performed services as a “jack of all trades”.     At times,

petitioner would assist on legal cases, allegedly performing only

paralegal work.
                                 - 5 -


     While employed at the Taylor firm, petitioner experienced

“problems” relating to the fact that he was a disbarred lawyer.

Counsel opposing the Taylor firm would draw attention to

petitioner’s disbarred status through court pleadings.    For

example, opposing counsel had filed an ex parte motion to contest

a ruling requiring them to pay attorney’s fees to the Taylor

firm, asserting that they did not want to contribute to the

unauthorized practice of law.    These and other manufacturers'

defense attorneys, working on behalf of large automotive

companies, made disparaging comments against petitioner and the

Taylor firm in retribution for the successes they were having

litigating lemon law matters.

     In response to the “disparaging” comments and to “remove the

stigma attached” to the status of being disbarred, petitioner

reapplied for admission to the California Bar in 1989.    He sat

for and passed the California bar exam for the second time.      He

then waited for the Committee to complete their moral character

review.

     In the course of this review, the Committee elicited

background information from petitioner, including his then-recent

activities at the Taylor firm.    The Committee also contacted

attorneys who had opposed the Taylor firm in its attempt to find

information about petitioner’s reputation and moral character.

As a result of this investigation, several members of the lemon
                               - 6 -


law defense bar came forward to make allegations against

petitioner.   Based on petitioner’s history and those allegations,

the Committee challenged petitioner’s admission to the bar on

moral character grounds.   Petitioner contested the Committee’s

determination in the California State Bar Court (Bar Court).

     The legal costs in dispute are a result of petitioner’s

challenge to the Committee’s determination.   The Bar Court

proceeding was similar to a civil trial, with petitioner having

the burden of proof.   It was an evidentiary hearing overseen by a

referee, where witnesses testified and were cross-examined.    Six

members of the manufacturing defense community testified against

petitioner.   The referee did not issue an immediate ruling, but

took the matter under submission.

     Meanwhile, as a result of the negative publicity the Taylor

firm had received relating to his employment, petitioner left the

firm at the end of August 1991.   He continued his association

with the firm, however, as a part-time consultant through the end

of that year.   Petitioner was forced to leave the Taylor firm

because it was “too high profile for a disbarred lawyer to be

running the firm, given all the negatives attached to it”.

     In April 1992, the Bar Court referee ruled that petitioner,

in light of his past disbarments and the 6 attorneys testifying

against him, did not satisfy his burden and recommended that

petitioner be denied admission to the California Bar.   Petitioner
                                - 7 -


appealed this ruling to the State Bar Appellate Section, but was

unsuccessful.    The Appellate Section not only affirmed the

referee’s determination, but, in addition, found that petitioner

had been engaged in the unauthorized practice of law.

     On their 1991 Schedule A, petitioners claimed a $5,4333

employee business expense deduction as a result of the legal

expenses incurred in challenging the Committee’s determination.

This amount includes expenditures for discovery and lawyer’s

fees.    In the notice of deficiency, the Commissioner disallowed

this deduction.

                             Discussion

     Deductions are a matter of legislative grace, and

petitioners must prove that they are entitled to the claimed

deduction.    Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992).    Section 162 allows a deduction for all ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business.     Moreover, section 212

allows a deduction for ordinary and necessary expenses paid or

incurred during the taxable year for the production or collection

of income.    Personal expenditures, however, are not deductible.

Sec. 262.


     3
        Petitioner submitted checks totaling $5,672 in support of
the above deduction and now claims a deduction for that amount.
Respondent has agreed to accept petitioner’s increased amount if
petitioner prevails on the substantive issue.
                               - 8 -


     We have repeatedly held that a taxpayer may not deduct fees

paid and costs incurred to gain admission to a State bar under

section 162(a).   Sharon v. Commissioner, 66 T.C. 515, 527 (1976),

affd. per curiam 591 F.2d 1273 (9th Cir. 1978); Ryman v.

Commissioner, 51 T.C. 799, 801-803 (1969).   We have based our

holding, in part, on the rationale that since a taxpayer could

reasonably expect the useful life of a license to extend beyond 1

year (i.e., indefinitely), the cost of such license is a non-

deductible capital expenditure.   Moreover, educational

expenditures that are paid or incurred to meet the minimum

educational requirements for qualification in a taxpayer’s trade

or business or which qualify the taxpayer for a new trade or

business are “personal expenditures or constitute an inseparable

aggregate of personal and capital expenditures and, therefore,

are not deductible as ordinary and necessary business expenses”.

Sec. 1.162-5(b), Income Tax Regs.   Likewise, the regulations

under section 212 specifically prohibit the deductibility of “bar

examination fees and other expenses paid or incurred in securing

admission to the bar”.   Sec. 1.212-1(f), Income Tax Regs.

     On the other hand, legal expenses are deductible under

section 162(a) as ordinary and necessary business expenses if the

litigation is directly connected with or proximately related to

the taxpayer’s business.   Bingham’s Trust v. Commissioner, 325

U.S. 365, 373-374 (1945); Rafter v. Commissioner, 60 T.C. 1, 8
                                 - 9 -


(1973), affd. without published opinion 489 F.2d 752 (2d Cir.

1974).    The “origin-of-the-claim” which gave rise to the

litigation, rather than the consequence of the litigation, is

evaluated to ascertain whether the expenses are business or

personal in nature.    United States v. Gilmore, 372 U.S. 39, 48-49

(1963).

     In the present case, we are faced with the convergence of

the above legal principles.    Petitioner attempts to deduct legal

expenses incurred through his effort to gain admission to the

California Bar.    He contends that he is entitled to deduct these

fees as an ordinary and necessary business expense.      Petitioner

asserts that his primary purpose for seeking admission to the

California Bar was to protect his job at the Taylor firm and to

defend his professional reputation.      Conversely, respondent

argues that the legal fees are nondeductible expenditures.

Respondent contends that the origin of petitioner’s legal action

stemmed from his application to the California Bar and is

therefore nondeductible.    We agree with respondent.

     Petitioner confuses the concept of the origin-of-the-claim

with that of the consequence or the primary purpose of the

litigation.    Only the origin-of-the-claim is relevant to the

disposition of this case.     Harden v. Commissioner, T.C. Memo.

1991-454.    Petitioner’s challenge to the Committee’s

determination gave rise to the legal fees in question.      Hence,
                              - 10 -


the origin of petitioner’s claim is his attempt to gain admission

to the California Bar.

     Our holding is supported by United States v. Gilmore, supra.

The issue before the Supreme Court was whether a husband’s legal

expenses in divorce proceedings were deductible.    The husband’s

overriding concern in the litigation was:   (1) To protect certain

assets, upon which the husband relied for his principal means of

livelihood, from his wife’s claims; and (2) to defend against his

wife’s reputation-damaging charges of marital infidelity which,

if found, might also have adversely affected the husband’s

principal means of livelihood.

     In finding that the expenses were not deductible, the

Supreme Court rejected a test that looked to the consequences of

the litigation.   Instead of examining the taxpayer’s motives or

purposes for the undertaking the litigation, the Supreme Court

examined the origin and character of the claim.    In so doing, the

Supreme Court concluded that the claim arose out of the personal

relationship of marriage, rather than in a business context.

     Similarly, under the facts before this Court, while

petitioner’s primary purpose for bringing suit in Bar Court might

have been to protect his job and business reputation, his motives

for initiating the process are not considered.    Equally

irrelevant are the consequences the suit may have had on

restoring petitioner’s business reputation, had he prevailed.
                              - 11 -


What is dispositive, however, is the fact that the legal expenses

in question arose out of an action to gain admission to the

California Bar.   These costs are treated as bar admission

expenses and are, therefore, nondeductible under either section

162 or 212.   Accordingly, petitioners are not entitled to their

claimed deduction.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
