                        T.C. Memo. 1998-161



                      UNITED STATES TAX COURT



        JEAN W. LANGE AND JEANNE P. LANGE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3317-96.                Filed May 5, 1998.



     David R. Rhein, for petitioners.

     J. Anthony Hoefer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FAY, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes as follows:
                                - 2 -


                Year                           Deficiency
                1992                            $48,689
                1993                             19,490
                1994                              8,743




The sole issue for decision is whether petitioners are entitled

to deductions under section 162 or section 212 for legal expenses

paid during the years 1992, 1993, and 1994.1

                          FINDINGS OF FACT

     Most of the facts have been stipulated and are so found.

The stipulations of facts and attached exhibits are incorporated

herein by this reference.    At the time the petition in this case

was filed, petitioners resided in Sac City, Iowa.

     Petitioner Jean Lange (hereinafter referred to as peti-

tioner) and his brother, Elmer Lange (Elmer), acquired an 80-

percent interest in Union State Bank (the Bank) in late 1979 or

1980.    Later, the brothers formed Madison Holding Company

(Madison) and exchanged the Bank stock (and the debt they had

incurred in purchasing the Bank stock) for stock in Madison.

While each brother had purchased an equal number of shares of the

Bank stock, petitioner incurred $120,000 more debt than Elmer in



     1
      All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
                                    - 3 -


acquiring the Bank stock.    To compensate for this disparity,

Elmer received 1,200 more shares of Madison preferred stock than

petitioner.   The Madison stock was issued as follows:

                       Common Shares        Preferred Shares
          Elmer             1,648                15,216
          Petitioner        1,648                14,016

     The preferred stock provides for a 50¢ per share, non-

cumulative, preferred dividend.       On dissolution, each share

entitles the holder to receive a $100 liquidation preference over

the common stock, but the holder is not entitled to receive

proceeds in excess of the $100 preference.          Finally, the

preferred stock is voting stock.

     Despite the inequality in their ownership positions, Elmer

and petitioner treated each other as equal partners.           When the

Bank suffered financial reverses in the 1980's, petitioner and

Elmer contributed equal amounts ($744,000 each) to Madison.

These funds were used to strengthen the Bank financially.

Petitioner was more involved with the Bank's daily operations,

and Elmer acquiesced to petitioner's management decisions.           The

record indicates that the brothers intended to equalize their

respective ownership positions in Madison at some future time.

None of the family members, other than the two brothers, was

aware of the disparity in stock ownership.

     In 1983, the brothers executed a buy/sell agreement to

provide for the disposition of Madison stock upon the death of
                               - 4 -


either of them.   The agreement gave the surviving brother the

right to purchase the common and preferred stock from the

deceased brother's widow.   The buy/sell agreement was executed by

both brothers and their respective spouses.
                               - 5 -


     In 1985, Elmer tried to equalize ownership of the Madison

preferred stock.   His accountant informed him that, to equalize

their ownership positions, Madison could issue 1,200 additional

shares to petitioner or Elmer could sell 600 of his shares to

petitioner.   Petitioner and Elmer agreed that it would be easier

to have Elmer sell 600 shares of his preferred stock to peti-

tioner.   This transaction never occurred, however, due to

concerns over the Bank's financial stability.

     Elmer died on May 6, 1990.   Elmer's widow, Beth, was

appointed executrix of his estate.     Beth soon discovered the

disparity in petitioner and Elmer's preferred stock ownership.

After some discussions between the respective families, an

agreement was drafted which acknowledged the disparity and

provided for a transfer of 600 shares of Madison preferred stock

to petitioner from Elmer's Estate in exchange for $60,000.     This

agreement was signed by petitioner and his family, but Elmer's

heirs refused to sign.   Shortly thereafter, Elmer's heirs

expressed a desire to retain majority ownership in Madison.

     When petitioner realized that Elmer's heirs intended to

retain majority control, he became concerned that this would

adversely impact the management of the Bank.     In February 1991,

petitioner passed a corporate resolution whereby Madison

attempted to redeem 1,500 shares of preferred stock and 1,054
                               - 6 -


shares of common stock from Elmer's estate.   Later, petitioner

appointed his son to be a director of Madison.   Petitioner and

his son amended the resolution to increase, by 250 shares, the

number of preferred shares that were to be redeemed by Madison.

     On February 21, 1991, petitioner and his son held another

directors' meeting.   At this meeting, they authorized the

issuance of 2,000 shares of Madison common stock to petitioner in

exchange for a reduction in Madison's debt owed to him.

     Elmer's heirs filed a lawsuit in the Iowa District Court for

Madison County, alleging petitioner had breached a fiduciary duty

owed to Madison shareholders by authorizing the issuance of the

2,000 shares of common stock to himself, and by attempting to

have Madison redeem the common and preferred stock from the

heirs.   Petitioner counterclaimed, seeking various remedies
                                  - 7 -


including specific performance of the redemption and the sale of

600 Madison preferred shares from Elmer's estate.2


     2
      The counterclaims are as follows:
                            COUNTERCLAIMS
          Defendants/Counterclaim Plaintiffs Jean W. Lange
     and Gene C. Lange [petitioners' son], for their coun-
     terclaims against Beth Thomas Lange, Mary Beth
     Williams, and Martha Jane Lange, state:
     *      *       *         *           *   *       *
                 COUNT I:    DECLARATORY JUDGMENT
     *      *       *         *           *   *       *
          16. A present controversy exists among the
     parties regarding the legal effect of certain actions
     taken by Madison Holding Co., the Estate of Elmer F.
     Lange, Beth Thomas Lange, Mary Beth Williams, Martha
     Jane Lange, Jean W. Lange, and Gene C. Lange, including
     but not limited to:

     a.   whether the agreement for the sale of 600 shares
          of Madison Holding Co. preferred stock to Jean W.
          Lange is valid and enforceable;
     b.   who owns the stock of Madison Holding Co. held by
          Elmer F. Lange before his death;
     c.   whether the stock certificate forms signed by Beth
          Thomas Lange purportedly as President of Madison
          Holding Co. are valid;
     d.   whether the noticed redemption by Madison Holding
          Co. of 1,054 common shares and 1,750 preferred
          shares is valid;
     e.   whether the consideration for the 2,000 shares of
          common stock issued to Jean W. Lange of February
          21, 1991 was adequate and whether said issuance
          was consistent with the rights of all concerned;
          and
     f.   whether the bylaws of Madison Holding Co. create
          enforceable rights in favor of Madison Holding Co.
                                                   (continued...)
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     On October 1, 1992, the district court issued its opinion in

Lange v. Lange, Equity No. 23300.      This ruling was appealed to

the Iowa Supreme Court, which held that the agreement, whereby

Elmer's estate was to sell 600 shares to petitioner, should be

enforced.   The Iowa Supreme Court also held that the district


     2
      (...continued)
          WHEREFORE, Jean W. Lange and Gene C. Lange pray
     for a declaration that (i) the agreement for the sale
     of 600 shares of Madison Holding Co. preferred stock is
     valid and enforceable; (ii) the Estate of Elmer F.
     Lange is and continues to be a stockholder of Madison
     Holding Co., subject to the redemption by Madison
     Holding Co. with respect to 1,054 common shares and
     1,750 of the preferred shares, and further subject to
     Jean W. Lange's contract rights with respect to an
     additional 600 preferred shares; (iii) the stock
     certificate forms signed by Beth Thomas Lange pur-
     portedly as President of Madison Holding Co. are of no
     force or effect; (iv) the noticed redemption of 1,054
     common shares and 1,750 preferred shares is valid;
     (v) the consideration for the 2,000 shares of common
     stock was adequate and said issuance was consistent
     with the rights of all concerned; and (vi) all the
     rights of Madison Holding Co., Jean W. Lange, and Gene
     C. Lange under the bylaws are valid and enforceable;
     and such other further relief as may be equitable in
     the premises; and for the costs of this action.
                  COUNT II:   SPECIFIC PERFORMANCE
     *       *       *         *           *   *       *
          WHEREFORE, Jean W. Lange and Gene C. Lange pray
     for specific performance of the redemption of stock by
     Madison Holding Co. from the Estate of Elmer F. Lange;
     and further pray that counterclaim defendants Beth
     Thomas Lange, Mary Beth Williams and Martha Jane Lange
     be required to take all steps necessary to cause the
     Estate of Elmer F. Lange to perform the agreement for
     the sale [of] 600 shares of Madison Holding Co. pre-
     ferred stock; and for such other further relief as may
     be equitable in the premises; and for the costs of this
     action.
                                - 9 -


court properly voided both petitioner's attempt to have Madison

redeem the stock from Elmer's estate and his attempt to have

Madison issue 2,000 shares of common stock to himself.3

     Petitioner and his wife filed joint income tax returns for

1992, 1993, and 1994.    In these returns, they claimed deductions

for legal fees in the amounts of $150,877, $50,737, and $30,040,

respectively.    All of the legal fees related to the above litiga-

tion.    Respondent determined that petitioner and his wife were

not entitled to current deductions for the legal fees that they

incurred.

                               OPINION

     We must decide whether the legal fees paid by petitioner

were deductible during the years at issue.    Petitioner argues

that the fees were properly deducted pursuant to section 162 or

section 212.    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".    Sec. 162(a).    Section 212

allows a deduction for all "ordinary and necessary expenses paid

or incurred during the taxable year--(1) for the production or

collection of income".    Sec. 212(1).   Petitioner bears the burden

of proving that he satisfies the requirements under section 162

or section 212.    Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).

     3
        See Lange v. Lange, 520 N.W.2d 113 (Iowa 1994).
                                - 10 -


      Respondent argues that the deductibility of the legal fees

is governed by section 263.    Section 263 disallows deductions for

capital expenditures.    Legal expenses paid to defend or perfect

title to property are capital expenditures and are not currently

deductible.   Woodward v. Commissioner, 397 U.S. 572, 575-576

(1970); Boagni v. Commissioner, 59 T.C. 708, 711-712 (1973).

      We must look to the origin of the claim to decide whether

the legal fees paid by petitioner are currently deductible.

Woodward v. Commissioner, supra at 577-578.    The origin-of-the-

claim test requires us to examine the "origin" and "character" of

the legal claim rather than the taxpayer's subjective purpose in

filing the lawsuit.     Id.; United States v. Gilmore, 372 U.S. 39,

49 (1963).    In Gilmore the Supreme Court said:

      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 * * * [United States v.
      Gilmore, supra at 49].

The origin of the claim is identified by analyzing all of the

facts and circumstances surrounding the litigation.     Id. at 47-

48.   If the origin of the claim involves the defense or

protection of title to property, the legal fees are nondeductible

capital expenditures.     Brown v. United States, 526 F.2d 135, 138-

139 (6th Cir. 1975); Boagni v. Commissioner, supra at 713.      The
                                - 11 -


question to be answered is, out of what kind of transaction did

the litigation arise.     Boagni v. Commissioner, supra.

     The facts surrounding the litigation between petitioner and

Elmer's heirs are not in dispute.    After his brother died,

petitioner took various steps to protect his ownership of Madison

stock and to acquire additional shares of such stock.      Elmer's

family resisted petitioner's efforts and filed suit against

petitioner and his son.    Petitioner counterclaimed, seeking a

declaration that the attempted redemption from Elmer's estate and

issuance of stock to petitioner were valid and seeking an order

for specific performance of the agreement to sell 600 shares.

     Petitioner argues that he undertook the litigation to

protect his position at the Bank.    Petitioner points to several

of respondent's revenue rulings holding that litigation expenses

incurred to defend a taxpayer's actions as an employee are

deductible as ordinary and necessary expenses incurred in the

conduct of a trade or business.    See Rev. Rul. 74-394, 1974-2

C.B. 40; Rev. Rul. 71-470, 1971-2 C.B. 121.     Petitioner contends

the origin of the claim was the heirs' attempt to remove

petitioner from his job at the Bank.     Because petitioner filed

his claims in part to protect his employment at the Bank,

petitioner reasons that the legal fees he incurred are currently

deductible.   We disagree.
                              - 12 -


     The litigation arose because petitioner caused Madison to

issue additional shares of stock to himself, and he attempted to

have Madison redeem shares of stock from Elmer's heirs.   Peti-

tioner, in his counterclaim, sought to enforce an agreement to

purchase 600 shares from Elmer's estate in order to equalize the

stock ownership as between the families.    The claims have their

origin in the protection, defense, and acquisition of peti-

tioner's ownership interest in Madison stock.   While petitioner's

purpose in undertaking the litigation might have included

protecting his job, this is not determinative under the origin-

of-the-claim test.   See Bradford v. Commissioner, 70 T.C. 584,

591 (1978); see also Mitchell v. Commissioner, T.C. Memo. 1994-

237 (and cases cited therein), affd. 73 F.3d 628 (6th Cir. 1996).

Petitioner, through litigation, sought to establish his ownership

of additional shares of Madison stock.   We conclude that the

litigation costs were incurred to defend, protect, and acquire

petitioner's title to the Madison stock and therefore constitute

nondeductible capital expenditures which should be added to the

basis of petitioner's Madison stock.   See Galewitz v. Commis-

sioner, 411 F.2d 1374 (2d Cir. 1969), revg. 50 T.C. 104 (1968);

Lin v. Commissioner, T.C. Memo. 1984-581.    Accordingly, we

sustain respondent's determination in the notice of deficiency.

     To reflect the foregoing,
- 13 -


     Decision will be entered for

respondent.
