                        T.C. Memo. 2000-362



                      UNITED STATES TAX COURT



           ERIC TEST AND ODELIA BRAUN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4907-99.                  Filed November 27, 2000.



     Karen L. Hawkins, for petitioners.

     G. Michelle Ferreira, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge: Respondent determined a $24,647 deficiency in

petitioners’ 1994 Federal income tax and a $4,929 accuracy-

related penalty pursuant to section 6662(a).1   The issues for our

consideration are:   (1) Whether legal fees incurred by


     1
       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.
                               - 2 -

petitioners are deductible as Schedule C business expenses or as

Schedule A miscellaneous itemized deductions, and (2) whether

petitioners are liable for the accuracy-related penalty under

section 6662(a).

                        FINDINGS OF FACT2

     Petitioners resided in Redwood City, California, at the time

they filed their petition.   Petitioners filed a joint Federal

income tax return for the 1994 tax year.

     Odelia Braun (petitioner) is a medical doctor, who in 1985

was hired as an Associate Physician Diplomate and Assistant

Clinical Professor of Medicine at the University of California,

San Francisco (UCSF).   When petitioner began working at UCSF, she

was responsible for patient care in the emergency room and for

training residents and medical students.    Petitioner acquired an

interest in the aspect of emergency medicine that was provided

before the patient arrived at the hospital; i.e., the care that

was rendered by paramedics and firefighters.

     From 1985 through 1987, petitioner undertook a study of

cardiac arrest emergency response systems in San Francisco,

California, and around the United States.   Petitioner, with the

assistance of paramedics and firefighters, collected medical data

on all patients who suffered cardiac arrest in San Francisco and


     2
       The stipulation of facts and the exhibits attached thereto
are incorporated herein by this reference.
                               - 3 -

learned that only 4 percent survived.     Petitioner traveled around

the country and visited other emergency medical services (EMS) to

determine whether improvements in the San Francisco EMS systems

could be made.   After undertaking these studies, petitioner put

together a proposal for the City of San Francisco to revamp the

EMS system.   One specific part of the proposal focused on the

need to get defibrillators to the people suffering from cardiac

arrest sooner, for example by putting defibrillators on

firetrucks.

     After petitioner’s plan was approved by the board of

supervisors, the department of public health, and the San

Francisco Fire Department, petitioner approached her supervisors

at UCSF.   The university created the Center for Prehospital

Research and Training (CPRT) as a structure for petitioner to

work in and continue her research.     In 1987, petitioner became

the director of CPRT.   CPRT taught emergency preparedness and

cardiac pulmonary resuscitation (CPR) to the public and studied

prehospital cardiac arrest treatment.     Petitioner’s main role as

director of CPRT centered on research.

     During her years as director of CPRT, petitioner

successfully wrote research grant proposals and contract

proposals for training firefighters in medical procedures,

training emergency medical technicians and paramedics for

ambulances, training school teachers in CPR, training school
                               - 4 -

children in emergency recognition and response, and for training

the general public in CPR.   By 1993, petitioner had received

local, statewide, and national acclaim and letters of support for

her efforts to improve public awareness of the need to learn and

perform CPR at the earliest possible indication of a heart

attack.   Prominent members of the medical and political

communities supported her efforts to expand her public sector

training concepts.

Petitioner’s Business Venture--Save-a-Life Systems

     As petitioner was implementing emergency medical response

training programs within public entities, she formulated the idea

that private sector emergency response systems were needed to

coordinate with the public systems in order to insure that

cardiac emergencies which occurred in private facilities received

the proper recognition and the proper medical response until the

public emergency response system arrived on the scene.     As a

result, petitioner decided that there was a need to teach people

in public and private facilities how to recognize an emergency in

progress, where to find emergency equipment placed within the

building, how to place a call to the public emergency response

system using “911", and how to administer CPR and/or use a

defibrillator until the arrival of the public emergency response

team.
                               - 5 -

     In an effort to prove that expansion of the emergency

medical response training into the private sector was worthwhile,

petitioner worked with the San Francisco Giants organization to

create the first prototype for a private facility emergency

response system.   The ushers at Candlestick Park were trained to

recognize emergencies and to communicate the occurrence of an

emergency to the paramedics and emergency response teams located

throughout the stadium.   Automatic defibrillators were also

placed in the stadium for use by the trained staff during cardiac

emergencies.   Petitioner’s work with the San Francisco Giants’

emergency response program was done in her individual, private

capacity and not as the director of CPRT.

     In May 1992, petitioner collaborated with others in

preparing a business plan for a private company called “WorkSafe

America Corp.”   The business plan expanded on petitioner’s

concept to bring EMS systems into the private sector by

encouraging private industry to purchase defibrillation equipment

and place it in strategic locations where statistics showed the

public was more apt to need and benefit from access to such

equipment.   The strategy was to create a consortium of vendors

(of defibrillators), large employers, and an

implementation/training team headed by petitioner which would

place equipment and trained personnel in locations where heart
                               - 6 -

seizures were most likely to occur--in private work and

recreational facilities.

     In June 1992, petitioner met with Attorney Lawrence

Eisenberg for advice regarding how to set up a business.     They

discussed the steps needed to introduce petitioner’s WorkSafe

America Corp. concepts of providing emergency medical care

training and defibrillator training to the private sector.     The

name to be utilized for petitioner’s concept was revised when

petitioner applied to the Department of Corporations in

California and learned that the name WorkSafe America Corp. was

already being used by another organization.   The new name

selected by petitioner was “Save-a-Life Systems” (SLS), but the

concepts and goals for petitioner’s private business did not

change.

     In November 1993, a new business plan for SLS was developed

and petitioner met with different defibrillation companies.

Negotiations went the farthest with Physio-Control, a

defibrillator manufacturer located in Redmond, Washington.

During the first quarter of 1994, petitioner, Mitchell Rappaport,

and Doron Braun traveled to Washington to meet with Physio-

Control and present their plan to the multiple areas within the

organization.   The purpose of the meeting was to share

petitioner’s concepts and seek a partnership with Physio-Control

which would result in funding for SLS.   The meeting with Physio-
                                - 7 -

control was very positive, and petitioner believed that Physio-

Control was prepared to partner with SLS and provide funding for

her private business venture.

The State Audit of CPRT

     In November 1993 the State of California Office of the State

Auditor initiated an audit of UCSF which was directed at the

department of medicine and included CPRT.   The State audit was

precipitated by allegations of noncompliance with university

policy leveled against the department of medicine.

     Harry Cordon, director of audit and management services at

UCSF, was responsible for all interaction with the Office of

State Auditor during its conduct of the audit.   UCSF was

concerned about certain procedures being employed during the

State audit and retained Coopers & Lybrand to perform a shadow

audit.   During both the State audit and the Coopers & Lybrand

audit, petitioner made herself available and expended a great

deal of time and effort providing information requested by the

auditors.   At no time during the audits did Harry Cordon believe

petitioner’s position at UCSF was in jeopardy or that she should

be concerned about her employment with UCSF.   In fact, petitioner

received continued assurances during the audits that her position

was secure with the CPRT, and in June 1994, USCF extended

petitioner’s contract as director of CPRT through June 1995.     The

State’s audit report was made public in November 1994.
                              - 8 -

     Between July and November 1994, the San Francisco Chronicle

and the San Francisco Examiner newspapers published several

articles referencing CPRT and the State audit.   As a result of

these articles, petitioner was concerned that adverse publicity

would impact her ongoing efforts to obtain funding for SLS.    In

June 1994, petitioner consulted with two attorneys, Charlotte

Fishman and Laura Stevens, because of concerns she had about

leaks of information to the media regarding the State audit and

the potential impact of adverse publicity to her professional

reputation.

     On June 30, 1994, petitioner retained the law firm of

Rogers, Joseph, O’Donnell & Quinn (RJO&Q).   Petitioner consulted

with her lawyers at RJO&Q many times in 1994.    On the advice and

recommendation of RJO&Q, petitioner also retained the law firm of

Topel & Goodman.

     According to RJO&Q’s billing reports, the following legal

services were performed for petitioner during June, July, August,

and September 1994: (1) Research, preparation, and drafting of

documents for the criminal prosecution of petitioner and CPRT;

(2) preparation of a lawsuit to prevent the release of the draft

State audit report; (3) research, preparation, and meetings with

respect to the State audit investigation of CPRT; (4) review of

documents in petitioner’s personnel file regarding sex

discrimination; (5) research, preparation, meetings, and drafting
                               - 9 -

correspondence with respect to the Coopers & Lybrand audit of

CPRT; (6) responding and communicating with the media; and (7)

communication with petitioner’s criminal defense attorney,

William Goodman.   All of the billing statements sent to

petitioner from RJO&Q for services performed in June, July,

August, and September of 1994 were, according to their heading,

regarding the “State audit of CPRT and Dr. Braun”.

     Between July and November 1994, petitioner and her lawyer

consulted with a public relations firm regarding media response

strategy and the preparation of press releases on behalf of

petitioner.   As a result of the adverse publicity being printed

in the San Francisco news media, petitioner put the incorporation

and development of SLS on hold.   Around this time, Physio-Control

also put its plans to fund SLS on hold.

Petitioners’ Tax Return

     Petitioners’ 1994 Federal income tax return was prepared by

Ronald Stern, a certified public accountant (C.P.A.).   Mr. Stern

had prepared petitioners’ income tax returns for 15 years.

Before preparing petitioner’s Schedule C for the 1994 tax year,

Mr. Stern discussed with petitioner the purpose of the legal and

professional services proposed to be deducted.

     For the 1994 tax year, petitioners deducted $87,300 on

Schedule C for legal and professional fees.   Respondent

determined that petitioner’s legal fees, in the amount of
                             - 10 -

$70,611, are deductible as a Schedule A miscellaneous itemized

deduction as opposed to a Schedule C deduction.3   Respondent also

determined that petitioner is entitled to an additional

depreciation deduction on her Schedule C in the amount of $3,180.

                             OPINION

     The issues for our consideration are:   (1) Whether legal

fees in the substantiated amount of $64,412.36 and/or $6,198.64

of expenses in connection with SLS are deductible on petitioner’s

Schedule C as ordinary and necessary business expenses or whether

they are deductible on petitioners’ Schedule A as unreimbursed

employee business expenses subject to the 2 percent of adjusted

gross income floor and the alternative minimum tax, and (2)

whether petitioners are liable for an accuracy-related penalty

under section 6662(a).

Legal Expenses

     Section 162(a) allows a deduction for “all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.    Ordinary and necessary legal

expenses are generally deductible under section 162(a) when the

matter giving rise to the expenses arises from, or is proximately

     3
       While petitioners deducted $87,300 in legal and
professional fees on Schedule C, Profit or Loss From Business, of
their Form 1040, U.S. Individual Income Tax Return, in 1994, they
have conceded that only $70,611 has been substantiated. Of the
$70,611 in substantiated expenses, $6,198.64 were expended by
petitioner for services in connection with petitioner’s Save-a-
Live systems (SLS) business.
                               - 11 -

related to, a business activity.    See Kornhauser v. United

States, 276 U.S. 145, 153 (1928).

      In order to be deductible on Schedule C, an expense must be

directly connected with, or proximately result from, a trade or

business of the taxpayer.   See id.; O’Malley v. Commissioner, 91

T.C. 352, 361 (1988), affd. 972 F.2d 150 (7th Cir. 1992).      If a

taxpayer’s trade or business is that of being an employee,

however, then the legal expenses will be treated as an itemized

deduction, subject to the limitation of section 67.   See McKay v.

Commissioner, 102 T.C. 465 (1994), revd. on other grounds 84 F.3d

433 (5th Cir. 1996); Alexander v. Commissioner, T.C. Memo. 1995-

51.

      The deductibility of legal fees depends on the origin and

character of the claim for which the expenses were incurred and

whether the claim bears a sufficient nexus to the taxpayer’s

business or income-producing activities.   See United States v.

Gilmore, 372 U.S. 39 (1963).   The Supreme Court stated 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”.

Id. at 49.   Thus, in order for petitioner’s legal fees to be

deductible on her Schedule C, the origin of those legal services

must have been rooted in SLS, her Schedule C business.

      Petitioners maintain that the legal fees are correctly
                                - 12 -

claimed on Schedule C because the expenses are directly related

to petitioner’s professional reputation, and thus SLS.

Respondent argues that the origin of petitioner’s legal fees did

not arise from her Schedule C trade or business, and that under

United States v. Gilmore, supra, the consequences to petitioner’s

Schedule C business are irrelevant to the analysis.

     Based upon the record, the origin of petitioner’s legal fees

stems from her status as an employee of UCSF, and not from her

Schedule C trade or business.    The event that prompted petitioner

to hire attorneys in 1994 was the State audit of CPRT and the

impending release of the audit report.    While the record is

replete with testimony from petitioner regarding the reasons she

retained legal counsel, it is also replete with evidence that the

event that prompted the legal services was the State audit.     The

billing detail from petitioner’s attorneys indicates that the

majority of their services concerned the impending release of the

State’s audit report and centered around the State audit of CPRT.

The billing detail further indicates that the legal services

performed were directly related to her employment with UCSF as

director of CPRT.   Indeed, the entire record indicates that

petitioner hired attorneys in response to the State audit of

CPRT.

     We do not question whether petitioner was engaged in a

Schedule C trade or business.    Nor do we doubt that petitioner
                              - 13 -

was indeed concerned that the State audit and consequences

flowing from the audit could negatively affect her professional

reputation and therefore her Schedule C business.   However, we

are bound by the rule established by United States v. Gilmore,

supra, to look to the origin of the underlying claim and not the

consequences.   Petitioner’s motives for hiring attorneys and

exploring her legal options simply are not relevant.   The origin

of the claim herein was not in the trade or business of SLS but

rather in petitioner’s activities as an employee of UCSF.    The

event that caused her to hire attorneys, the State audit of CPRT,

was directly related to her employment as director of CPRT.     The

legal expenses were incurred in response to an event that was not

part of SLS’ business, but, rather, was part of petitioner’s

employment.   Thus, the fact that the legal services may have

resulted in damage control necessary to fend off disparaging

publicity and salvage petitioner’s Schedule C business

relationships is irrelevant because the State audit, which had

nothing to do with SLS, was the precipitating event.

     Petitioners contend that the legal fees were not incurred in

connection with any litigation, but instead they were incurred to

seek advice and counsel.   Thus, they argue, it is appropriate to

examine the nature of the taxpayer’s concerns and the reason the

advice is sought.   Petitioners cite Ahadpour v. Commissioner,

T.C. Memo. 2000-68, for the proposition that costs associated
                                - 14 -

with legal advice obtained while trying to protect one’s business

reputation are deductible.   Petitioners’ reliance on Ahadpour,

however, is inapposite because in that case we (1) did not

consider whether the taxpayer was protecting his professional

reputation, (2) concluded that the taxpayer was not entitled to a

deduction for legal fees, and (3) did not suggest that a separate

test for determining deductibility applies when dealing with fees

for legal advice as opposed to fees for litigation.    Indeed, in

Ahadpour v. Commissioner, supra, we utilized the “origin of

claim” test set forth in United States v. Gilmore, supra.

     Accordingly, we find that the claim or event that prompted

petitioner to incur legal fees did not arise in connection with

petitioner’s Schedule C trade or business, and therefore we

sustain respondent’s determination that the legal fees in the

amount of $64,412.36 are deductible as unreimbursed employee

business expenses on Schedule A.

     With respect to the $6,198.64 expended by petitioner for

services in connection with petitioner’s SLS business,

petitioners are entitled to claim that amount as a business

expense on the Schedule C for the 1994 taxable year.

Accordingly, to that extent, petitioners have shown respondent’s

determination to be in error.
                              - 15 -

Accuracy-Related Penalty

     Respondent determined that petitioners underpaid a portion

of their income tax because of negligence.     Section 6662(a)

imposes a penalty in an amount equal to 20 percent of the portion

of the underpayment attributable to negligence or disregard of

rules or regulations.

     Negligence is defined as any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code, and the term “disregard” includes any careless, reckless,

or intentional disregard.   Sec. 6662(c).    The accuracy-related

penalty will apply unless petitioners demonstrate that there was

reasonable cause for the underpayment and that they acted in good

faith with respect to the underpayment.     See sec. 6664(c)(1).

     Taxpayers can avoid liability for the accuracy-related

penalty if they engage a competent professional to prepare their

returns, and they reasonably rely on the advice of that

professional.   See Freytag v. Commissioner, 89 T.C. 849, 888

(1987), affd. 904 F.2d 1011, 1017 (5th Cir. 1990), affd. 501 U.S.

868 (1991).   Taxpayers must show that they provided all relevant

information to the professional.   See Pessin v. Commissioner, 59

T.C. 473, 489 (1972).

     Applying these principles to the instant case, we conclude

that petitioners have sustained their burden of establishing that

reasonable cause and good faith existed for deducting legal fees
                               - 16 -

on petitioner’s Schedule C.   Petitioner testified credibly at

trial that she engaged the professional services of Ronald Stern,

a C.P.A., to prepare petitioners’ income tax return for 1994.

Mr. Stern had prepared petitioners’ income tax returns for the

past 15 years.    According to petitioner, Mr. Stern questioned her

about the legal and professional fees because he wanted to

understand what services the attorneys were performing.

Accordingly, petitioner provided him with information regarding

those expenses.

     The characterization of legal fees in this case as either a

Schedule A or a Schedule C deduction involves analyzing and

applying a set of facts to a technical area of the law.    Thus, in

the context of determining the correct deduction for legal

expenses that touch both upon a taxpayer’s employment and trade

or business, it is reasonable for a taxpayer to consult and rely

on a C.P.A.   Here, petitioners were clearly relying on Mr. Stern

to determine the proper characterization and deduction of the

legal fees.   Based on the record we find that petitioners have

proved that their actions with respect to characterizing the

legal fees as Schedule C deductions were reasonable and are not

subject to the section 6662(a) accuracy-related penalty.

     Respondent also contends the fact that petitioners claimed

deductions in excess of what they actually substantiated warrants

the imposition of the accuracy-related penalty.   Petitioners were
                               - 17 -

able to substantiate only a portion of the deductions that they

claimed on Schedule C.    Petitioners did not provide any

explanation as to why they were unable to substantiate all of the

legal fees that they claimed as deductions.    Thus, with respect

to the substantiation item, we find that petitioners have failed

to show that their actions were reasonable and not made with

intentional disregard of rules or regulations.     Under these

circumstances, we hold that petitioners are liable for the

accuracy-related penalty under section 6662(a) on the portion of

any underpayment attributable to the deduction of legal fees that

were not substantiated.

     We have considered all other arguments of the parties, and

to the extent not addressed herein we find them to be either

moot, meritless, or irrelevant.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
