                  T.C. Memo. 2000-120



                UNITED STATES TAX COURT



       SHARON PURCELL DILEONARDO, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5508-97.             Filed April 5, 2000.



     P is a one-sixth income beneficiary of a trust. In
State court, P filed objections to an accounting by the
trustee. The State court (1) ruled against P, (2) required
P to compensate the trustee, the other beneficiaries, and a
guardian ad litem for their expenses in dealing with P’s
objections, and (3) directed the trustee to use P’s share of
the trust distributions to accomplish this compensation. P
reported as income her share of the trust’s income and
deducted the court-ordered payments.

     Held: The origin and character of the claim resulting
in P’s payments was the trustee’s filing of an accounting,
proposing a distribution, and acknowledging that an argument
could be made for a different apportionment of the proposed
distribution; P’s payments are deductible under sec. 212(1)
and (2), I.R.C. 1986.
                                - 2 -

     Sharon Purcell DiLeonardo, pro se.

     Alan E. Staines, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHABOT, Judge:   Respondent determined deficiencies in

Federal individual income tax and an addition to tax under

section 6651(a)(1)1 (late filing of tax return) against

petitioner as follows:

                                        Addition to Tax
               Year      Deficiency       Sec. 6651(a)

               1993        $3,517           $879
               1994        18,887             0




1
     Unless indicated otherwise, all section and chapter
references are to sections and chapters of the Internal Revenue
Code of 1986 as in effect for the years in issue.
                               - 3 -

     After concessions by both sides,2 the issue for decision is

whether under section 212 petitioner may deduct payments she made

as ordered by a California court.


                         FINDINGS OF FACT

     Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.

     When the petition was filed in the instant case, petitioner

resided in Santa Rosa, California.

The Trust

     Petitioner is an income beneficiary of a testamentary trust

established by the will of petitioner’s grandfather, L.O. Ivey.

This testamentary trust is hereinafter sometimes referred to as

the Trust.   L.O. Ivey’s will was admitted to probate in 1978.



2
     Petitioner concedes that she is liable for an addition to
tax under sec. 6651(a) for 1993, except insofar as our
redetermination of the deficiency for that year reduces or
eliminates the base for calculation of this addition to tax.
Petitioner also concedes that she is not entitled to deductions
under sec. 162.

     Respondent concedes that, if petitioner’s expenditures are
qualitatively deductible, then the amounts that petitioner
deducted are the correct amounts. In the pleadings respondent
suggested, and in the opening statement respondent plainly
contended, that allowance of the claimed deduction would
frustrate California public policy. On opening brief, however,
respondent concedes this issue.
                               - 4 -

By July 1, 1991, the other income beneficiaries of the Trust were

petitioner’s mother, Helen True Purcell, hereinafter sometimes

referred to as Purcell, and petitioner’s two siblings.    Purcell

and petitioner’s two siblings are hereinafter sometimes

collectively referred to as the other beneficiaries3.    Purcell

was entitled to receive 50 percent of the Trust’s income.

Petitioner and her two siblings were each entitled to receive

one-sixth of the Trust’s income.   See infra note 3.

     Crocker National Bank acted as trustee for the Trust until

May 31, 1986, when Crocker National Bank was acquired by Wells

Fargo Bank.   Wells Fargo Bank, hereinafter sometimes referred to

as the Trustee, has acted as the Trust’s Trustee since May 31,

1986.

     Petitioner’s husband, Joseph DiLeonardo, hereinafter

sometimes referred to as DiLeonardo, is licensed by California as

both an attorney and a real estate broker.

The Third Account and the Objections

     On July 5, 1991, the Trustee filed with the Superior Court

of the State of California for the County of Los Angeles

(hereinafter sometimes referred to as the California Court), its


3
     There also was a lifetime annuitant, who was entitled to
receive $100 per month. This annuitant did not play a role in
the proceedings described infra; her interest was sufficiently
insignificant so that we join the parties in ignoring it for
purposes of analyzing the parties’ dispute in the instant case.
                               - 5 -

third accounting (hereinafter sometimes referred to as the Third

Account), covering the period October 1, 1987, through April 15,

1991.   Petitioner and DiLeonardo each received a copy of the

Third Account.

     Among other matters in the Third Account, the Trustee

recommended a distribution of “delayed income” with respect to

the sale of L.O. Ivey’s residence after the death of L.O. Ivey’s

widow, who had lived in the residence rent-free pursuant to a

court-ordered probate homestead.   The Trustee calculated the

amount payable to each of the income beneficiaries, but

acknowledged that a different formula would result in a

different, smaller, current distribution.   The Trustee asked the

California Court to provide instructions on this matter and, in

connection therewith, to appoint a guardian ad litem to represent

minor and unborn contingent remainder beneficiaries.   The Trustee

also proposed that the net profit from the sale of that residence

be allocated half to income and half to principal.

     After reviewing the Third Account, DiLeonardo advised

petitioner to contact an attorney specializing in probate matters

to review the Third Account, make recommendations, and represent

petitioner as needed.   DiLeonardo contacted several attorneys on

petitioner’s behalf.

     Two attorneys, John D. Burroughs, hereinafter sometimes

referred to as Burroughs, and Evan W. Field, hereinafter

sometimes referred to as Field, from the law firm of Burroughs,
                               - 6 -

Froneberger & Field, reviewed the Third Account.   Burroughs and

Field agreed to represent petitioner if any action were necessary

regarding the Third Account.   Petitioner paid a small amount to

Field and Burroughs to do some investigative and preliminary

work.   Field and Burroughs agreed to a contingency fee

arrangement for their representation of petitioner concerning the

Third Account.

     Field told petitioner that he had spoken with his father-in-

law, Professor Halbach, regarding the Third Account.   Field told

petitioner that Professor Halbach was the former Dean of Boalt

Hall School of Law at the University of California and a foremost

expert on trusts in the United States.   Field also told

petitioner that Professor Halbach recommended that petitioner be

very aggressive in objecting to the Third Account.

     Thereafter, DiLeonardo, Burroughs, and Field recommended

that petitioner object to the Third Account in two ways: (1)

Object to the actions of the Trustee during the period covered by

the Third Account and ask for reductions in the Trustee’s fees or

that the Trustee be surcharged, and (2) object to the Trustee’s

request for authority regarding new actions.   Burroughs prepared

Objections to the Third Account and Report of the Trustee,

hereinafter sometimes referred to as the Objections, for

petitioner.   Two meetings between DiLeonardo, Burroughs, Field,

and petitioner were held before petitioner signed the Objections.
                               - 7 -

     It appears that, after the Trustee’s first account,

petitioner filed objections to that account, and those objections

resulted in substantial reductions in the Trustee’s fees.   At

that time, the Trustee tried to have sanctions imposed on

petitioner but was unsuccessful in that attempt.   With this

experience in mind, DiLeonardo, Burroughs, Field, and petitioner

discussed whether the Trustee would move for sanctions or an

award of litigation costs against petitioner if she filed the

Objections.   DiLeonardo, Field, and Burroughs represented to

petitioner that this would not happen because the Objections were

good on their face and would not subject petitioner to any kind

of sanction, penalty, or litigation costs award.   After

consultation with DiLeonardo, Field, and Burroughs, and after

assurances that the Objections were reviewed by Professor Halbach

and investigated by another law firm, petitioner signed the

Objections.

     On August 7, 1991, petitioner filed the Objections with the

California Court.   Petitioner made several Objections to the

Third Account, including the following:

     Guardian ad litem.   Petitioner agreed that a guardian ad

litem should be appointed, but objected to the Third Account by

asking the California Court to delay authorizing the distribution

until the guardian was appointed and had sufficient time to
                                - 8 -

review the Third Account, appear before the California Court, and

make appropriate objections.

     Insufficiently productive assets.     Petitioner contended that

the Trustee failed to earn a normal rate of return on trust

assets, focusing on two of these assets.    One asset was the

residence which had been occupied by L.O. Ivey’s widow after his

death.    Petitioner contended that the Trustee failed to make the

property productive after the death of L.O. Ivey’s widow and that

the Trustee sold the residence for only $3.5 million, although

the residence had been appraised at $5.2 million and there had

been offers to buy the residence for more than $3.5 million.     The

other asset was a series of gypsum mining claims located in

Nevada.   L.O. Ivey owned the claims for 10 to 12 years before his

death.    For nearly 15 years the Trust did not receive income from

the claims but did incur expenses associated with them.    The

Trustee disposed of the claims after petitioner filed the

Objections.

     Charges of bias and fraud.    Petitioner charged that the

Trustee failed to protect the interests of income beneficiaries

with regard to the residence that had been occupied by L.O.

Ivey’s widow, and that, to make up for this, the Trustee proposed

to distribute the proceeds of the sale of that residence in a way

that would fail to protect the interests of the remainder

beneficiaries.   Petitioner proposed that the income
                                - 9 -

beneficiaries’ lost income be made up for out of the Trustee’s

assets and not by taking away what should go to remainder

beneficiaries.   Petitioner charged that the Trustee should have

opposed homestead status for the residence of L.O. Ivey’s widow,

and that the Trustee’s failure to oppose homestead status was a

breach of fiduciary duty which may have resulted from “an

extrinsic fraud”.    The asserted extrinsic fraud involved a

conflict of interest in that the conservator for L.O. Ivey’s

widow (the conservator also was a residual beneficiary of the

widow’s estate) was married to a partner in the law firm that

represented the Trustee, as a result of which the Trustee acted,

or failed to act, in a manner that favored L.O. Ivey’s widow over

the other beneficiaries of the Trust.

     Investments too aggressive.    Petitioner charged that there

was a large turnover in the Trust’s investment portfolio, and

contended that she should be given the opportunity to investigate

the situation.

     Self-dealing.    Petitioner charged that the Trustee

improperly deposited substantial cash amounts in the Trustee’s

own money market accounts and contended that there should be an

examination of comparative interest rates and costs to determine

whether income beneficiaries were disadvantaged by these

deposits.
                               - 10 -

The Litigation, Award of Costs.

     On November 8, 1991, the California Court granted summary

adjudication in favor of the Trustee on most of the Objections.

On November 12, 1991, the remaining Objections were withdrawn by

Burroughs.

     After the remaining Objections were withdrawn, the Third

Account was approved by the California Court.   The California

Court also ordered that the extraordinary distributions provided

for in the Third Account be held pending the other beneficiaries’

motion for litigation costs.   In December 1991, the other

beneficiaries moved against petitioner for litigation costs.

     The California Court awarded litigation costs to the other

beneficiaries, the Trustee, and the guardian ad litem, stating as

follows:

          F. Based upon all of the evidence presented at
     trial, Sharon DiLeonardo’s failure to explain or deny
     by her testimony the evidence in the case against her,
     the matters of which judicial notice was taken, and the
     Court’s prior issue-preclusion sanction, the Court
     finds: each and all of Sharon DiLeonardo’s Objections
     to the Third Account were frivolous; she knew that her
     Objections to the Third Account were frivolous; she
     knew that the Third Account was proper; she would have
     objected to essentially anything that was included
     within the Third Account; that each and all of her
     Objections to the Third Account were totally and
     completely without merit; that each and all of her
     Objections to the Third Account were made in bad faith;
     that each and all of her Objections to the Third
     Account were made for the sole purpose of harassing
     opposing parties; that each and all of her Objections
     to the Third account were made willfully and
     maliciously to injure the trustee or the beneficiaries
                               - 11 -

     of the Trust; that each and all of her Objections to
     the Third Account were intended by her to be punishment
     and vindictive; that Sharon DiLeonardo’s bad faith was
     compounded by her stonewalling on discovery; and that
     she willfully suppressed material evidence.

     The California Court ordered petitioner to pay the

litigation costs, plus interest, of the other beneficiaries, the

Trustee, and the guardian ad litem.      Petitioner’s obligations

under this order are hereinafter sometimes referred to as the

Payments.   The California Court further ordered that the Payments

be paid out of petitioner’s portion of distributions from the

Trust.   The amounts the Trustee was directed by the California

Court to pay, and the payees, are summarized in Table 1.

                               Table 1

                 Payee                                Amount

            Other beneficiaries                    $203,474.91
            Trustee and guardian ad litem           147,040.75

              Total                                 350,515.66

     The California Court’s order was affirmed by the California

Court of Appeal for the Second District.      Estate of Ivey v.

DiLeonardo, 28 Cal. Rptr. 2d 16 (Ct. App. 1994).

Tax returns

     Table 2 shows selected items from petitioner’s tax returns.

                               Table 2

                                          1993             1994

     Income from the Trust            $49,546.00      $113,478.00
     Adjusted gross income             50,571.93       120,540.70
     Litigation cost deduction         53,000.00       159,718.00
      (before 2-percent floor)
                              - 12 -

     No part of the Payments constitutes a capital expenditure.

No part of the Payments is allocable to a class of income wholly

exempt from income taxes.   No part of the Payments is interest on

indebtedness incurred or continued to purchase or carry

obligations the interest on which is wholly exempt from income

taxes.

     Petitioner’s obligation to make the Payments arose from the

Trustee’s filing of the Third Account.   The Payments were

incurred in entirety for, and are proximately related to, the

production or collection of income, or for the management,

conservation, or maintenance of property held for the production

of income.

                              OPINION

     Petitioner contends that the Payments are deductible under

section 212 as expenses arising from an attempt to produce income

or to preserve, maintain, and conserve property held for the

production of income.

     Respondent contends that the Payments are not deductible

under section 212 because they were not ordinary and necessary

–-in particular, respondent states that the Payments were not

made “with the purpose and reasonable expectation that income

would flow directly therefrom to” petitioner (sec. 212(1)), and

that petitioner’s “immediate purpose” for making the Payments was

not “the management, conservation, or maintenance of property

held for the production of income”, sec. 212(2).   In addition,
                             - 13 -

respondent contends that, under the “‘origin of the claim’ test”,

the Objections did “not constitute the relevant litigation”, but

that--

     The relevant litigation is that which was initiated by
     those persons who opposed petitioner’s Objections to
     the Third Account and who prosecuted both a motion for
     monetary sanctions and a petition to charge
     petitioner’s share of the trust’s income with the
     payment of such monetary sanctions.

In addition, respondent contends that the California Court--

     determined that the underlying reasons for petitioner’s
     objections to the trustee’s accounting were vindictive,
     intended as punishment, initiated in bad faith, and
     based on petitioner’s animosity with respect to the law
     firm representing the trustee.

Respondent concludes from this that section 262 prohibits

deductions for petitioner’s Payments.   In the alternative,

respondent states that if the payments meet the “ordinary and

necessary requirement” of section 212, then they are nevertheless

not deductible because petitioner failed to carry her burden of

allocating the payments between deductible and nondeductible

portions.

     Petitioner responds that (1) she had to make the payments in

order to receive income from the Trust, thus meeting the

“ordinary and necessary” requirement; (2) the origin of the claim

is petitioner’s filing of the Objections, an income-focused act

that does not fall under section 262; and (3) the entire

obligation to make the Payments arose from the one document-–the
                               - 14 -

Objections–-“and therefore all fees arose from the litigation and

are deductible.”

     We agree with petitioner’s conclusions and part of

petitioner’s analysis.

     Section 2124 allows a deduction for expenses to produce or

collect income or to manage, etc., property held for the

production of income.

     Section 212 is coextensive in most respects with section

162(a), and taxpayers may not deduct expenses under section 212

that could not be deducted under section 162(a) were the expenses

connected to a trade or business.    See Trust of Bingham v.

Commissioner, 325 U.S. 365, 373-376 (1945) (discussing the

predecessors of secs. 212 and 162(a)); Guill v. Commissioner, 112

T.C. 325, 328 (1999).    As we have noted:

     “[E]xcept for the requirement of being incurred in
     connection with a trade or business,” however, a deduction
     under section 212 “is subject * * * to all the restrictions
     and limitations that apply in the case of the deduction


4
     Sec. 212 provides, in pertinent part, as follows:

     SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.

          In the case of an individual, there shall be allowed as
     a deduction all the ordinary and necessary expenses paid or
     incurred during the taxable year--

               (1) for the production or collection of income;

               (2) for the management, conservation, or
          maintenance of property held for the production of
          income; * * *
                               - 15 -

     under * * * [section 162(a)] of an expense paid or incurred
     in carrying on any trade or business.” [Estate of Davis v.
     Commissioner, 79 T.C. 503, 507 (1982) (quoting from H. Rept.
     2333, 77th Cong., 2d Sess. (1942), 1942-2 C.B. 372, 430; S.
     Rept. 1631, 77th Cong., 2d Sess. (1942), 1942-2 C.B. 504,
     571, the legislative history to the predecessor of section
     212).

     For purposes of the instant case, section 212 must be

applied in the light of section 262(a),5 which generally

disallows deductions for personal expenses.     In United States v.

Gilmore, 372 U.S. 39, 44, 45-46 (1963), the Supreme Court

described as follows the relevant relationships between the 1939

Code predecessors of sections 162(a) (sec. 23(a)(1)), 212 (sec.

23(a)(2)), and 262(a) (sec. 24(a)(1)):

                                 I.

          For income tax purposes Congress has seen fit to regard
     an individual as having two personalities: “one is [as] a
     seeker after profit who can deduct the expenses incurred in
     that search; the other is [as] a creature satisfying his
     needs as a human and those of his family but who cannot
     deduct such consumption and related expenditures.”11 The
     Government regards § 23(a)(2) as embodying a category of the
     expenses embraced in the first of these roles.

                 *    *    *     *      *   *    *

          A basic restriction upon the availability of a
     § 23(a)(1) deduction is that the expense item involved must
     be one that has a business origin. That restriction not
     only inheres in the language of § 23(a)(1) itself, confining


5
     SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.

          (a) General Rule.--Except as otherwise expressly
     provided in this chapter [chapter 1, relating to normal
     taxes and surtaxes], no deduction shall be allowed for
     personal, living, or family expenses.
                                - 16 -

     such deductions to “expenses * * * incurred * * * in
     carrying on any trade or business,” but also follows from
     § 24(a)(1), expressly rendering nondeductible “in any case
     * * * [p]ersonal, living, or family expenses.” See note 9,
     supra. In light of what has already been said with respect
     to the advent and thrust of § 23(a)(2), it is clear that the
     “[p]ersonal * * * or family expenses” restriction of
     § 24(a)(1) must impose the same limitation upon the reach of
     § 23(a)(2)–-in other words that the only kind of expenses
     deductible under § 23(a)(2) are those that relate to a
     “business,” that is, profit-seeking, purpose. The pivotal
     issue in this case then becomes: was this part of
     respondent’s litigation costs a “business” rather than a
     “personal” or “family” expense?
     11
          Surrey & Warren, Cases on Federal Income Taxation, 272
(1960).

     We consider first the origin-and-character-of-the-claim test

to determine whether the Payments stemmed from petitioner’s

personality as “a seeker after profit” or from petitioner’s

personality as “a creature satisfying * * * [her] needs as a

human”.    United States v. Gilmore, 372 U.S. at 44.   We then

consider whether the Payments are ordinary and necessary expenses

of her profit-seeking activity.    Finally, we consider

respondent’s contention about apportionment.

A. Origin and Character of the Claim

     In the instant case it may be helpful to begin by analyzing

United States v. Gilmore, supra, and its companion case, United

States v. Patrick, 372 U.S. 53 (1963).

     In United States v. Gilmore, supra at 41, the taxpayer

claimed a deduction for certain litigation expenses arising out

of the taxpayer’s and his wife’s divorce suit.    The taxpayer’s
                                - 17 -

“overriding concern in the divorce litigation was to protect * *

* [certain] assets against the claim of his wife.”     Ibid.   The

assets were controlling stock interests in certain corporations,

the dividends and salaries from which amounted to substantially

all of the taxpayer’s income.    Ibid.   The taxpayer won a complete

victory in his divorce case.    Id. at 42.   The Court of Claims

allocated 80 percent of the taxpayer’s legal expenses to the

taxpayer’s focus on protecting his assets and 20 percent to all

other aspects of the divorce litigation, and allowed deductions

for the 80 percent under sections 23(a)(2), I.R.C. 1939, and

212(2), ruling that deductions for the remaining 20 percent were

barred by sections 24(a)(1), I.R.C. 1939, and 262.    See id. at

40, 43.   In United States v. Gilmore, 372 U.S. at 49, the Supreme

Court described its conclusion as to the legal standard to be

used in analyzing such situations:

     we resolve the conflict among the lower courts on the
     question before us * * * in favor of the view that the
     origin and character of the claim with respect to which an
     expense was incurred, rather than its potential consequences
     upon the fortunes of the taxpayer, is the controlling basic
     test of whether the expense was “business” or “personal” and
     hence whether it is deductible or not under § 23(a)(2). * *
     * [Emphasis added.]

     Although in Gilmore the taxpayer’s focus was (and, according

to the Court of Claims, 80 percent of his expenditures were

spent) on protecting the assets that clearly were the source of

substantially all of his income, the Supreme Court directed its
                              - 18 -

analysis to what gave rise to the threat that the taxpayer sought

to overcome.   That threat was the wife’s claim.   The wife’s

claim, the Supreme Court determined, “stemmed entirely from the

marital relationship, and not, under any tenable view of things,

from income-producing activity.”    Id. at 51.   Applying this to

the search for “the origin and character of the claim with

respect to which an expense was incurred,” (id. at 49) the

Supreme Court concluded as follows:    “Thus none of respondent’s

[Gilmore’s] expenditures in resisting these claims can be deemed

‘business’ expenses, and they are therefore not deductible under

§ 23(a)(2).”   [Id. at 52.]

     In a companion case, United States v. Patrick, 372 U.S. 53

(1963), the taxpayer’s wife sued for divorce.    See id. at 54.

Negotiations resulted in a property settlement agreement.       See

ibid.   The divorce court then granted an absolute divorce to the

wife, approved the property settlement, and ordered the taxpayer

to pay the attorney’s fees for both parties.     See ibid.     The

taxpayer and his wife allocated the total fees as follows:

$4,000 for handling the divorce itself, $16,000 for rearranging

the stock interests in a family corporation that the taxpayer

headed, and $4,000 for dealing with certain leases and

transferring property to a trust.   See id. at 54-56.    The

taxpayer claimed deductions for those portions of the attorney’s

fees allocable to the property settlement and not to the divorce
                               - 19 -

as such.   See id. at 56.   The Supreme Court pointed out that

Patrick is similar to Gilmore, summarizing its analysis (ibid.)

as follows:

     The principles held governing in that case are equally
     applicable here. It is evident that the claims asserted by
     the wife in the divorce action arose from respondent’s [the
     taxpayer’s] marital relationship with her and were thus the
     product of respondent’s personal or family life, not profit-
     seeking activity. As we have held in Gilmore, payments made
     for the purpose of discharging such claims are not
     deductible as “business” [i.e., sec. 212(2)] expenses.

     The Supreme Court in Patrick then commented as follows (id.
at 57):

          We find no significant distinction in the fact that the
     legal fees for which deduction is claimed were paid for
     arranging a transfer of stock interests, leasing real
     property, and creating a trust [in Patrick] rather than for
     conducting litigation [as in Gilmore]. These matters were
     incidental to litigation brought by respondent’s wife, whose
     claims arising from respondent’s personal and family life
     were the origin of the property arrangements. * * *

     We note that the Supreme Court in Patrick did not even

bother to discuss another difference between Patrick and

Gilmore–-in Gilmore, the taxpayer won his divorce case and his

sought-for deductions were only for his expenses; in Patrick,

half of the taxpayer’s sought-for deductions were for expenses of

his wife, which the taxpayer paid under compulsion of the local

court order.

     In the instant case, petitioner’s claimed deductions arose

from her payment of the relevant expenses of the other

beneficiaries, the Trustee, and the guardian ad litem.
                              - 20 -

Petitioner made the Payments because the California Court ordered

her to make them.   The California Court’s order directing

petitioner to make these Payments came in response to a petition

for equitable allocation and a motion for sanctions filed

separately by the other beneficiaries.   That petition and that

motion arose from petitioner’s Objections to the Third Account.

We do not continue to follow the steps all the way back to L.O.

Ivey’s will, establishing the Trust.   See Boagni v. Commissioner,

59 T.C. 708, 713 (1973).   Rather, we look for “‘the kind of

transaction out of which the obligation arose’”.   United States

v. Gilmore, 372 U.S. at 48 (quoting Deputy v. du Pont, 308 U.S.

488, 494 (1940)).

     After examining the record in the instant case we conclude,

and we have found, that petitioner’s obligation to make the

Payments arose from the Trustee’s filing of the Third Account.

The context of the Third Account is distributions from the Trust.

The distributions to petitioner arose from her status as an

income beneficiary.   Thus, after examining the origin and

character of the claim in the instant case, we conclude that

petitioner made the Payments in her personality of a “seeker

after profit”, United State v. Gilmore, 372 U.S. at 44, and

petitioner’s entitlement to deductions therefor is not barred by

section 262(a).

     Respondent contends as follows:
                              - 21 -

          Under this test, petitioner’s Objections to the Third
     Account do not constitute the relevant litigation for
     purposes of Section 212(1) and (2). The relevant litigation
     is that which was initiated by those persons who opposed
     petitioner’s Objections to the Third Account and who
     prosecuted both a motion for monetary sanctions and a
     petition to charge petitioner’s share of the trust’s income
     with the payment of such monetary sanctions.

We disagree.   The motion and petition were no more than responses

to petitioner’s Objections to the Third Account.   The motion and

petition would be pointless in the absence of petitioner’s

Objections and the Third Account.   Indeed, even the California

Court’s decree, requiring petitioner’s Payments to be made solely

out of petitioner’s current income from her income interest in

the Trust, confirms that the California Court regarded the

consideration and resolution of the motion and petition as being

part of a dispute about petitioner’s income from the Trust.

     Respondent contends as follows:

     In addition, those sanctions were imposed to compensate the
     victims of petitioner’s bad faith and vindictive actions.
     Such sanctions bear no relation to the production or
     collection of income or to the management, conservation, or
     maintenance of income producing property.

We disagree.

     In general, if the origin and character of the claim arise

out of a taxpayer’s personality as a seeker after profit rather

than satisfier of human needs, it does not matter that the

taxpayer’s expenditures are made because of the imposition of a

sanction to compensate the victims of the taxpayer’s improper
                              - 22 -

actions.   See, e.g., Ostrom v. Commissioner, 77 T.C. 608 (1981),

in which the taxpayer was allowed to deduct his payment of a jury

award of damages imposed on account of the taxpayer’s fraudulent

misrepresentation on which the plaintiff had relied to his

detriment.   To the same effect are the cases described in Ostrom

v. Commissioner, 77 T.C. at 611-613.   In the instant case, the

origin and character of the claim from which the liability arose

are petitioner’s personality as a seeker after profit.   This is

not affected by whether petitioner won or lost the underlying

litigation or even by whether the California Court imposed the

obligation on petitioner because that Court concluded that

petitioner had acted in bad faith and out of vindictiveness.

     The rule is otherwise in certain statutorily defined areas

(see, e.g., Huff v. Commissioner, 80 T.C. 804 (1983), dealing

with sec. 162(f)) and in the “public policy doctrine.”   See,

e.g., Commissioner v. Tellier, 383 U.S. 687 (1966).   As to what

remains of the public policy doctrine, see the opinions in

Stephens v. Commissioner, 93 T.C. 108 (1989), revd. 905 F.2d 667

(2d Cir. 1990).   However, as noted supra note 2, respondent has

conceded the public policy doctrine issue.   Also, clearly,

section 162(f) does not apply.   Thus, we return to our conclusion

that respondent’s argument about the Payments constituting

sanctions does not change our analysis or conclusions.
                               - 23 -

     Respondent notes opinions of this Court and other courts

indicating that “If the origin of the underlying suit is a

personal vendetta against others, the related expenses are not

deductible.”   Respondent contends that the California Court has,

in effect determined that petitioner’s filing of the Objections

is “the result of her personal vendetta”.

     Respondent does not contend that the California Court’s

findings should be given collateral estoppel or other preclusive

effect.   See Rule 39 of the Tax Court Rules of Practice and

Procedure.    Petitioner does not contend that those findings

should be excluded.   See generally 5 Weinstein, Weinstein’s

Federal Evidence sec. 803.28 [2] (2d Ed. 1997); 1 Weinstein, sec.

201.12 [3].    Thus, we are presented with a record that includes

the California Court’s findings and testimony before this Court

from petitioner and DiLeonardo.    At trial, we explained our role

vis-a-vis the California Court’s ruling, as follows:

          THE COURT: Mrs. DiLeonardo, as I had said before, we
     took the recess. We’re not here to re-try those
     proceedings. We’re not here to second-guess the wisdom of
     what was done in those proceedings. We’re here only to
     understand them to the extent necessary to decide whether or
     not these expense are deductible.

     The California Court reached the conclusions it stated in

the context of determining whether petitioner’s actions in the

proceeding before it justified punishment and, if so, then what

was the nature and extent of the justified punishment.   Our
                                - 24 -

context is different, as we noted in our discussion of Ostrom v.

Commissioner, supra.   The California Court imposed punishment and

explained its determination.    Its explanation and determination

are not in substantive conflict with our conclusion that

petitioner’s actions arose out of her efforts to produce or

collect income, or to manage, conserve, or maintain property held

for the production of income.    Meredith v. Commissioner, 47 T.C.

441 (1967), which respondent cites for the proposition that the

expenses of a personal vendetta are not deductible, illustrates

why we have concluded that the instant case had not yet

progressed to the vendetta stage.

     In Meredith the sequence was as follow:

     1949--taxpayer sued John Deere Plow Co. for breech of an
           oral agency sales contract. Taxpayer’s suit was
           dismissed. 89 F. Supp. 787 (SD Ia. 1950), affd. 185
           F.2d 451 (8th Cir. 1950).

     1952--taxpayer sued Deere to enforce an association
           agreement. Taxpayer’s suit was dismissed by order;
           affd. 206 F.2d 196 (8th Cir. 1953).

         --taxpayer sued Deere to enforce a contract.
           Taxpayer’s suit was dismissed by order; affd. 244 F.2d
           9 (8 Cir., 1957).

         --Deere sued taxpayer for injunction to prevent more
           suits. Judgment for Deere, granting injunction;
           affd. 261 F.2d 121 (8th Cir. 1958).

     1960--taxpayer sued Federal Judge involved in 1957 and 1958
           affirmances noted supra. Order granting summary
           judgment to that Judge; affd. 286 F.2d 216 (8th Cir.
           1960).

     1960--taxpayer sued Deere and Deere’s former counsel.
           Taxpayer held in contempt for violating injunction.
                              - 25 -

     In Meredith, the taxpayer sought deductions for 1961

expenditures in connection with the 1960 suits.   We summarized

the situation as follows (47 T.C. at 447):

          While the petitioner’s first action undoubtedly arose
     out of his business relationship with Deere, and the costs
     of that suit were ordinary and necessary expenses of his
     business, by the time he initiated the action against the
     judge and filed the last suit against Deere, in violation of
     the injunction, the original cause of action had ceased to
     have significance. The controversy had become a personal
     struggle, a vendetta, and the expenses incurred had no
     proper relationship to the petitioner’s business.

          The action brought against Judge Van Oosterhout related
     to decisions of the Court of Appeals made in the
     petitioner’s third suit against Deere and in Deere’s suit
     for an injunction. The business issue had been decided
     against petitioner long before these cases were initiated.
     There was no business relationship to the expenses of the
     action against the judge, which was a personal accusation
     completely without merit.

          For the reasons stated, we sustain the respondent’s
     determination.

     In contrast, the instant case is only the second one in

which petitioner has filed objections to the Trustee’s

accounting; petitioner proceeded only by way of the Objections

and only after the Trustee initiated an action; and the Trustee’s

accounting directly affected petitioner’s income from the Ivey

Trust.   Our analysis and conclusions are not inconsistent with

the determinations of the California Court.
                               - 26 -

B. Ordinary and Necessary

     In Trust of Bingham v. Commissioner, 325 U.S. 365, 373-374

(1945), the Supreme Court described section 23(a)(2), I.R.C.

1939,6 as follows:

     Section 23(a)(2) is comparable and in pari materia with
     § 23(a)(1), authorizing the deduction of business or trade
     expenses. Such expenses need not relate directly to the
     production of income for the business. It is enough that
     the expense, if “ordinary and necessary,” is directly
     connected with or proximately results from the conduct of
     the business. The effect of § 23(a)(2) was to provide for a
     class of nonbusiness deductions coextensive with the
     business deductions allowed by § 23(a)(1), except for the
     fact that, since they were not incurred in connection with a
     business, the section made it necessary that they be
     incurred for the production of income or in the management
     or conservation of property held for the production of
     income. [Emphasis added; citations omitted.]

We have concluded supra that there is the necessary proximate

relationship between the Payments and petitioner’s efforts to

produce or collect income or to manage, conserve, or maintain her

income beneficiary interest.

     We will not attempt to comprehensively summarize the

meanings of “ordinary” and “necessary” in the contexts of

sections 162(a) and 212.    See Carbine v. Commissioner, 83 T.C.

356, 362-364 (1984), affd. 777 F.2d 662 (11th Cir. 1985).

Suffice it to observe that generally a taxpayer’s payment of a



6
     The year before the Court in Trust of Bingham v.
Commissioner, 325 U.S. 365 (1945), was 1940. Sec. 23(a)(2),
I.R.C. 1939, was enacted in 1942; it applied to Trust of Bingham
because of the retroactive effective date of the 1942 enactment.
This is briefly described in Trust of Bingham v. Commissioner, 2
T.C. 853, 857-858 (1943), the Tax Court’s Court-reviewed opinion
that was affirmed by the Supreme Court.
                              - 27 -

judgment which arose out of the taxpayer’s trade or business is

an ordinary and necessary expense of the trade or business.   See

Ostrom v. Commissioner, 77 T.C. 608 (1981).   Section 212 is, in

this regard, in pari materia with section 162(a).   See Trust of

Bingham v. Commissioner, 325 U.S. at 373.   Petitioner’s Payments

of the judgment arose out of petitioner’s profit-seeking section

212 activity.   It was ordinary for a person in that situation to

make the Payments, and it was necessary for petitioner to make

the Payments.

     We conclude that petitioner’s Payments satisfy the

“ordinary” and “necessary” requirements of section 212.

C. Allocation

     Respondent contends that, even if a portion of petitioner’s

Payments satisfies the requirements of section 212(1) or (2)--

          Petitioner has presented no evidence which would enable
     the Court to allocate the total sanctions claimed between
     those amounts which purportedly qualify under Section 212(1)
     or (2) and those amounts which are strictly personal and
     therefore nondeductible under Section 262(a). Accordingly,
     petitioner is entitled to no deduction for the court-imposed
     sanctions at issue.

We recently summarized the law in this area as follows:

          We recognized that, when appropriate, litigation costs
     must be apportioned between business and personal claims,
     and that business litigation costs are nondeductible to the
     extent that they constitute capital expenditures. See, e.g.
     Kurkjian v. Commissioner, 65 T.C. 862 (1976) (deduction
     disallowed for portion of attorney’s fees attributable to
     personal matters); Buddy Schoellkopf Prods., Inc. v.
     Commissioner, 65 T.C. 640, 646-647 (1975) (deduction
     disallowed for portion of attorney’s fees attributable to
     acquisition of intangible assets); Merians v. Commissioner,
     60 T.C. 187 (1973) (deduction disallowed for portion of
     attorney’s fees attributable to personal matters); see also
                              - 28 -

     Boagni v. Commissioner, supra [59 T.C. 708 (1973)]
     (recognizing that litigation costs can be characterized as
     both deductible and nondeductible when the litigation is
     rooted in situations giving rise to both types of
     expenditures). * * * [Guill v. Commissioner, 112 T.C. 325,
     331 (1999).]

     Respondent supports the apportionment contention by citing

Pozzo di Borgo v. Commissioner, 23 T.C. 76 (1954); Looby v.

Commissioner, T.C. Memo. 1996-207; Page v. Commissioner, T.C.

Memo. 1970-112.   The common thread of distinction between those

cases on the one hand and the instant case on the other, is that

in each of the cases cited by respondent the Court concluded or

assumed arguendo that at least some part of the disputed expenses

had been incurred for a nondeductible purpose, while in the

instant case we conclude-–and we have found–-that the disputed

expenses were incurred in entirety for section 212(1) or (2)

purposes.   Also, in Pozzo di Borgo, the taxpayer merely lost in

her effort to claim at trial a deduction in excess of what she

had claimed on her tax return.   The taxpayer’s tax return claim

of a deduction for 63.4864 percent of the commission payments she

made apparently was not challenged, and so the taxpayer “face[d]

the burden of establishing that commissions in excess of the

amount deducted on her income tax return are not within the
                               - 29 -

limiting provisions of section 24(a)(5).”7    Pozzo di Borgo v.

Commissioner, 23 T.C. at 78.   (Emphasis added.)    The taxpayer

failed to establish the factual underpinnings for her contention

that some or all of the remaining 36.5136 percent of her

commission payments were not allocable to income or interest

wholly exempt from tax, and so we held for the Commissioner.        Id.

at 78, 81.8

     Thus, the cases that respondent cites to us do not provide

any instructions relevant to the instant case.     Respondent has

not suggested that the instant case involves any other

consideration, such as capital expenditures, or exempt income,

that might require apportionment, and our Findings of Fact

dispose of these theoretical possibilities.


7
     Sec. 24(a)(5), I.R.C. 1939, is the predecessor of sec.
265(a)(1) of present law, relating to disallowance of deductions
for expenses allocable to income or interest wholly exempt from
income taxes.
8
     We noted that the taxpayer’s contention as to the commission
payments, if proven, would transform that case into an
overpayment–-or refund-–case. See Pozzo di Borgo v.
Commissioner, 23 T.C. 76 (1954). For a discussion of the
differences between a taxpayer’s burden in a refund case and that
taxpayer’s burden in a deficiency case, see Helvering v. Taylor,
293 U.S. 507, 514-516 (1935), affg. Taylor v. Commissioner, 70
F.2d 619, 620-621 (2d Cir. 1934).
                               - 30 -

     We hold for petitioner.

     To reflect the foregoing,9



                                             Decision will be

                                        entered for petitioner.




9
     From the notice of deficiency and petitioner’s 1993 income
tax return, it is apparent that, as a result of our holding for
petitioner on the disputed issue, she does not have a 1993
Federal income tax liability. As a result, under paragraph (1)
and the last sentence of sec. 6651(a), the addition to tax
resulting from petitioner’s conceded failure to timely file her
1993 tax return is zero.
