                        T.C. Memo. 2003-295



                      UNITED STATES TAX COURT



                 HORACE D’ANGELO, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8049-01.              Filed October 23, 2003.



     Neal Nusholtz, for petitioner.

     Gregory C. Okwuosah, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioner petitioned the Court to redetermine

deficiencies of $35,742 and $26,756 in his 1995 and 1996 Federal

income taxes, respectively.   Following concessions,1 we decide:


     1
       In addition to the explicit concessions, we consider
petitioner to have conceded respondent’s determination that he is
entitled to deduct certain prepaid expenses in 1996, not in 1995.
                                                   (continued...)
                                  -2-

       1.   Whether the notice of deficiency is “arbitrary”.   We

hold it is not.

       2.   Whether petitioner may deduct a forgiven debt in the

amount claimed on his 1995 tax return.     We hold he may.

       3.   Whether petitioner was personally engaged in the trade

or business of developing industrial real estate.     We hold he

was.

       4.   Whether petitioner may under section 162 deduct certain

legal expenses paid by him.2    We hold he may.

       5.   Whether petitioner may under section 162 or 212 deduct

certain office expenses paid by him.     We hold he may not.

                           FINDINGS OF FACT

       Some facts were stipulated.   The stipulated facts and the

accompanying exhibits are incorporated herein by this reference.

We find the stipulated facts accordingly.     Petitioner resided in

Rochester Hills, Michigan, when the petition was filed.




       1
      (...continued)
Petitioner failed to advance any arguments as to this issue in
his brief. Accordingly, we deem the issue abandoned. Wilcox v.
Commissioner, 848 F.2d 1007, 1008 n.2 (9th Cir. 1988), affg. T.C.
Memo. 1987-225; Lunsford v. Commissioner, 117 T.C. 183, 187
(2001); Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001).
       2
       Unless otherwise stated, section references are to the
applicable versions of the Internal Revenue Code, Rule references
are to the Tax Court Rules of Practice and Procedure, and dollar
amounts are rounded to the nearest dollar.
                                 -3-

Petitioner’s Business Pursuits

     Petitioner has been a business associate of Keith Pomeroy

(Pomeroy) since the early 1980s.   In 1983, he and Pomeroy entered

into a Development Agreement (1983 Development Agreement).   It

provided, in relevant part:

     1.   Purpose. The principal purpose of the Parties
     acting together is to acquire, hold, develop, operate,
     and sell various real estate and building projects,
     primarily, although not exclusively, nursing homes and
     housing for the elderly. The Parties shall contribute
     equally funds as are required to acquire, hold,
     develop, operate and/or sell projects that are subject
     to this Agreement, and each shall own an undivided one-
     half interest in such projects. Only those projects
     will be acquired and developed on which there is
     unanimous agreement. Either Party may decline to
     participate in any project for any reason whatsoever.
     In such case, the other Party may not proceed with such
     project individually.

     Pursuant to the 1983 Development Agreement, petitioner and

Pomeroy through the years have organized numerous entities

primarily to acquire, develop, manage, and operate commercial

real estate.   Petitioner directly owned an interest in

approximately 21 real-estate-related entities during the subject

years and was involved with numerous other entities primarily by

virtue of contractual relationships through the entities which he

owned.   The relevant entities are Arbor Corporation (Arbor),

Peachwood Nursing Center (PNC), H.K. Peach, Inc. (H.K. Peach),

REH1 Corporation (REH1), TROY-SAK Associates (TROY-SAK), Lakeland
                                 -4-

Neuro Care Limited Partnership (Lakeland), and Crittenton

Development Center (Crittenton).

     Arbor was an S corporation that handled the day-to-day

record-keeping and management of the entities owned in whole or

in part by petitioner and Pomeroy.     Its stock was owned equally

by petitioner and Pomeroy until 1996 when Pomeroy transferred all

of his stock in Arbor to petitioner in connection with the

lawsuits discussed infra.    Arbor employed and paid the management

staff for the nursing homes that it managed.    These management

fees were then charged to the nursing home to the benefit of

which the services in question inured.    Petitioner was Arbor’s

president and managed its daily affairs.

     H.K. Peach was an S corporation owned equally by petitioner

and Pomeroy.   PNC was a partnership formed for the purpose of

leasing certain land and nursing homes constructed thereon.    PNC,

an accrual basis taxpayer, was owned equally by H.K. Peach and

Crittenton.    REH1 was an S corporation which owned and operated

the industrial real estate properties.    REH1 was owned 25 percent

by petitioner, 25 percent by Pomeroy, and 50 percent by other

unrelated individuals.   TROY-SAK was a real estate partnership

owned 25 percent by petitioner and 75 percent by Pomeroy and two

other individuals whose names are not material to this case.

Lakeland was a partnership owned 90 percent by REH1 and 10

percent by an unrelated entity named CMS Lakeland, Inc.    Lakeland
                                  -5-

was formed for the purposes of owning, developing, leasing, and

operating a certain subacute rehabilitation unit.    Crittenton was

a real estate development entity owned by persons unrelated to

petitioner and Pomeroy.

Debt Settlement

     Peachwood Center Associates (PCA)3 owned certain property

which it leased to PNC.    Beginning in 1989, PNC sublet the

property to Lakeland.     Shortly thereafter, Lakeland disputed the

amount of rent payable under the sublease agreement and declined

to pay the amount of that rate.    The situation resulted in an

arbitration proceeding between Lakeland, on the one hand, and PCA

and PNC, on the other hand.    The parties to the arbitration

proceeding resolved that and at least one other proceeding (the

Oakland 2 lawsuit described infra in which PCA and Crittenton

sued petitioner, Pomeroy, Arbor, and PNC) through an agreement

that included a debt settlement agreement (debt settlement

agreement) and a related redemption agreement (redemption

agreement).

     Pursuant to the debt settlement agreement, dated

November 22, 1995, Lakeland agreed to pay PNC $600,000 in

settlement of $992,796 of disputed rent that PNC consider owed



     3
       Peachwood Center Associates was a partnership in which
petitioner and Pomeroy each owned a 25-percent interest in 1995
and a 50-percent interest in 1996.
                                -6-

(and had accrued as income) on the sublease.   Lakeland agreed to

pay $200,000 of the $600,000 immediately and make subsequent

annual payments of at least $100,000 until the entire $600,000

(exclusive of interest at the prime rate) was fully discharged.

The debt settlement agreement provided:

     Notwithstanding anything contained herein to the
     contrary, the terms of this Agreement shall be
     contingent upon the consummation of the contemplated
     redemption of Crittenton Development Corporation’s
     interest in Peachwood Center Associates and Peachwood
     Nursing Center. Keith J. Pomeroy and Horace D’Angelo
     Jr. hereby agree to pursue in good faith the
     consummation of said redemption on an expeditious
     basis.

     Pursuant to the redemption agreement, dated November 30,

1995, PNC redeemed Crittenton’s 50-percent interest for cash.    As

of that date, PNC terminated for income tax purposes pursuant to

section 708(b)(1)(B).

     Because of the mandatory redemption of Crittenton and the

resulting termination of PNC, PNC and H.K. Peach considered the

eliminated debt of $392,796 (the original debt of $992,796 less

the settlement amount of $600,000) as a worthless debt that

belonged entirely to H.K. Peach.   Accordingly, on their

respective 1995 tax returns, PNC did not claim a deduction for

the eliminated debt, but H.K. Peach did.   Petitioner and Pomeroy,

each in his capacity as a 50-percent shareholder of H.K. Peach,

claimed for 1995 a bad debt deduction of $196,398 (1/2 of

$392,796).   Respondent in the notice of deficiency issued to
                                -7-

petitioner denied his claim to his 50-percent share of the bad

debt deduction.

Legal Expenses

     The differences between and among petitioner, Pomeroy, and

other investors led to a number of lawsuits (lawsuits).

Petitioner personally paid much of the legal fees connected to

the lawsuits, and he now claims that he may deduct these fees as

the ordinary and necessary expenses of his business, purportedly,

the development of industrial real estate.    The lawsuits involved

defending petitioner’s business practices, compelling

petitioner’s business associates to account for profits, and

related issues.   The lawsuits were handled mainly by the law

firms of Plunkett & Cooney; Williams, Schaefer, Ruby & Williams;

and Jacob & Weingarten.

     For 1995, petitioner incurred legal expenses in the

following proceedings which are at issue in this case: (1)

Oakland County Case No. 91-413151-CK (Oakland 1), (2) Oakland

County Case No. 89-367018-CB (Oakland 2), and (3) Oakland County

Case No. 93-455713 CK (Oakland 3).    Oakland 1 was a lawsuit by

Arbor against Pomeroy and others, to which petitioner was later

added as a cross-plaintiff.   The proceeding essentially involved

claims of diversion of management fees and breach of fiduciary

duty.   Oakland 2 was a lawsuit by PCA and Crittenton against

petitioner, Pomeroy, Arbor, and PNC.    The proceeding generally
                                 -8-

involved claims of breach of fiduciary duty, failure to pay rent,

and failure to make appropriate partnership contributions.

Oakland 3 was a lawsuit in which Pomeroy had accused petitioner

of, among other things, taking over H.K. Peach and otherwise

breaching his fiduciary duty.   With respect to all these

proceedings, petitioner claimed in 1995 as a deduction legal fees

of $90,392 (relating to Oakland 1 and Oakland 2) and $770

(relating to Oakland 3).

     For 1996, petitioner incurred legal expenses in the

following proceedings which are at issue in this case: (1)

Oakland 1, (2) Oakland 2, (3) Oakland County Case No. 91-413076-

CK (Oakland 4), and (4) Oakland County Case No. 93-455889

(Oakland 5).   Oakland 4 was a lawsuit where petitioner sued

individually and on behalf of REH1 as coplaintiffs.   The case

included an allegation against Pomeroy and others for a failure

to account for profits.    Oakland 5 was a lawsuit by Pomeroy and

his business partner, whose name is not material to this

proceeding, to compel petitioner to turn over his partnership

interest in TROY-SAK pursuant to an agreement.   In 1996,

petitioner claimed as a deduction legal fees of $57,799 (relating

to Oakland 1, Oakland 2, Oakland 3, Oakland 4, and Oakland 5).

     Respondent maintains that petitioner may not deduct these

amounts because he is not engaged in “any trade or business”
                                -9-

within the meaning of section 162(a) and/or because these amounts

constitute capital expenditures.

Office Expenses

     For 1995, petitioner deducted $14,065 of expenses, which he

personally bore after moving the office and the staff of Arbor

into a house he owned.   The move was precipitated by

disagreements that had arisen between petitioner and Pomeroy.

Petitioner and some of the Arbor employees worked in the office.

Those employees were a bookkeeper, an administrative assistant,

an individual responsible for Medical/Medicaid costing reports, a

comptroller, a secretary, and another individual responsible for

maintenance, landscaping, computers, and marketing.

     The expenses deducted by petitioner included costs of

furniture, asphalt repair, water softener, and other items.

Respondent asserts that these expenses belong to Arbor and thus

cannot be deducted by petitioner personally.     Additionally,

respondent maintains that the following items should be

capitalized and, if deductible, depreciated:

     Expense                             Amount

     Table                                $171
     Water softener                        188
     Asphalt repair                      1,850
     Furniture                             338
                               -10-

                             OPINION

I.   Burden of Proof

     In general, respondent’s determinations are presumed

correct, and taxpayers bear the burden of proving them wrong.

Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

As one exception to this rule, section 7491(a) places upon the

Commissioner the burden of proof with respect to any factual

issue relating to liability for tax if the taxpayer maintained

adequate records, satisfied applicable substantiation

requirements, cooperated with respondent, and introduced during

the court proceeding credible evidence on the factual issue.     A

taxpayer such as petitioner must prove that he has satisfied the

recordkeeping, substantiation, and cooperation requirements

before section 7491(a) places the burden of proof upon the

Commissioner.   Prince v. Commissioner, T.C. Memo. 2003-247.

     In that the record is sufficient for us to decide this case

on its merits based on a preponderance of the evidence, we need

not and do not decide which party bears the burden of proof in

this case as to the substantive issues.   We note, however, that

we disagree with petitioner’s assertion that the notice of

deficiency is arbitrary because it, unlike a notice of deficiency

issued to Pomeroy, did not include or refer to an exhibit that

explained the income-adjustment allocations relating to H.K.

Peach.   The notice of deficiency at hand correctly identified
                               -11-

petitioner, stated the disallowed amounts and the years to which

they pertain, and adequately explained the calculations employed

in arriving at them.

II.   Debt Settlement

      The parties agree that the $392,796 bad debt deduction

resulted from the forgiveness in the debt settlement agreement of

that amount of accrued rent and, more specifically, a settlement

of the proceedings discussed above.   The parties do not dispute

that PNC was entitled to deduct the eliminated debt as a bad debt

but challenge only the amount of that deduction allocable to

petitioner.

      Petitioner argues on brief that the debt was settled after

Crittenton’s termination and that he, as a 50-percent shareholder

of H.K. Peach, is entitled to deduct half ($196,398) of the debt.

Petitioner focuses primarily on respondent’s reference to the all

events test and argues that this test was not met before

Crittenton’s redemption in that the redemption was a vital term

of settlement.   Alternatively, petitioner argues, respondent’s

earlier resolution of this issue, coupled with respondent’s

representations to the Court, means that respondent is now

estopped from challenging the amount of his deduction in this

proceeding.

      Respondent argues on brief that the debt was settled before

Crittenton’s termination.   Thus, respondent concludes, only half
                                -12-

($196,398) of the bad debt flowed through to H.K. Peach (the

other half flowing through to Crittenton), and petitioner may

deduct only half of that half (in other words, $98,199).

Respondent reads PNC’s pretermination financial statements to

indicate that petitioner, in his capacity as president of Arbor,

believed that the debt was settled before Crittenton’s (and hence

PNC’s) termination.    In particular, respondent observes, PNC

recorded in those statements a $600,000 note receivable that it

received from Lakeland in connection with the debt settlement

agreement.    Respondent makes no mention of the terms of

redemption in the debt settlement agreement but considers the

reporting of the $600,000 note receivable to be dispositive of

this issue.

     On the basis of the facts and circumstances of this case, we

hold for petitioner.   We conclude from our reading of the debt

settlement agreement that the $392,796 was not forgiven until

after the redemption of Crittenton.    The parties to that

agreement went to great lengths to memorialize their

understanding that this redemption was a condition precedent to

the settlement of the debt.    Respondent has not alleged that the

debt settlement agreement was a sham or that the terms thereof

should be disregarded by the Court.    We respect the express terms
                                   -13-

of the debt settlement agreement and hold for petitioner.4      H.K.

Peach, PNC’s successor, may deduct the entire amount of the

eliminated debt, and petitioner, as a 50-percent shareholder of

H.K. Peach, may deduct $196,398, or one-half of the entire

amount.

III.       Engaged in a Trade or Business

       Petitioner argues that his extensive involvement in real

estate business ventures places him in a trade or business of

developing industrial real estate during the subject years.

Respondent maintains that petitioner’s involvement with the real

estate has always been on behalf of Arbor.       Respondent concludes

that petitioner was not personally engaged in a trade or

business.       We agree with petitioner.

       Petitioner began his real estate career more than 20 years

ago.       In 1995 and 1996, he was actively involved in developing

the industrial real estate and nursing home businesses, in

accordance with the terms of the 1983 Development Agreement.

Over the years, petitioner and Pomeroy, alone and sometimes with

others, built a number of industrial rental and nursing home

rental partnership enterprises.       Petitioner personally ran a

substantial part of the operations, supervising Arbor’s

management activities and the partnerships’ rental activities.



       4
       On the basis of our holding, we need not and do not
discuss petitioner’s alternative argument.
                               -14-

Petitioner was also in charge of applying for and procuring the

licenses necessary to conduct the operations relating to nursing

homes within the State of Michigan.

     A general partner may be deemed to be conducting the trade

or business activity of the partnership in which he or she is a

member.   Hoffman v. Commissioner, 119 T.C. 140 (2002); see also

Flood v. United States, 133 F.2d 173, 179 (1st Cir. 1943); Cokes

v. Commissioner, 91 T.C. 222, 228 (1988); Drobny v. Commissioner,

86 T.C. 1326, 1342 (1986); Brannen v. Commissioner, 78 T.C. 471,

504 (1982), affd. 722 F.2d 695 (11th Cir. 1984); Ward v.

Commissioner, 20 T.C. 332, 343 (1953), affd. 224 F.2d 547 (9th

Cir. 1955).   See generally Rev. Rul. 92-17, 1992-1 C.B. 142.

Moreover, the trade or business of the partnership may be imputed

to a general partner irrespective of the fact that the partner

did not actively or materially participate in the partnership.

Bauschard v. Commissioner, 31 T.C. 910, 916-917 (1959), affd. 279

F.2d 115 (6th Cir. 1960).   Additionally, an individual taxpayer

may be engaged in more than one trade or business.   Oliver v.

Commissioner, 138 F.2d 910 (4th Cir. 1943), affg. a Memorandum

Opinion of this Court.

     Respondent concedes that petitioner was materially involved

in developing the real estate and nursing home businesses.

Nevertheless, respondent argues that at all times when petitioner
                               -15-

was so involved, he was acting on behalf of Arbor.     The record as

a whole indicates otherwise.

     We agree that merely providing services to a corporation to

increase its value does not rise to the level of a trade or

business other than a trade or business of performing services as

an employee.   However, while petitioner did devote substantial

time and effort to running the business of Arbor, his activities

were not so limited.   Petitioner was actively involved in

procuring licenses for operation of nursing homes, selecting

location of buildings and their design, and similar engagements.

Moreover, the 1983 Development Agreement attests to the intention

of petitioner and Pomeroy to engage in a trade or business of

developing “various real estate and building projects, primarily,

although not exclusively, nursing homes and housing for the

elderly.”   The record demonstrates that petitioner fulfilled that

intention during the years in question.

     A trade or business is a continuous and regular vocation

engaged in for profit.   See generally Commissioner v.

Groetzinger, 480 U.S. 23 (1987).   According to the record, during

the years at issue, petitioner actively carried out the business

activities referenced in 1983 Development Agreement.     We find

that these activities rose to the level of his own trade or

business pursuant to the terms of the 1983 Development Agreement.

See Hoffman v. Commissioner, supra.   We hold that during 1995 and
                               -16-

1996, petitioner was engaged in a trade or business of developing

industrial real estate.

IV.   Legal Fees

      At issue here are professional fees of $770 and $90,392 for

1995, and $57,799 for 1996.   These amounts were incurred by

petitioner in the course of his participation in several lawsuits

in the Oakland County District Court in his capacity as an

officer, partner, and/or shareholder of the entities he owned in

whole or in part.

      Petitioner maintains that these amounts are deductible by

him under section 162 as the ordinary and necessary business of

his trade or business of developing industrial real estate.

Alternatively, petitioner asserts, these amounts are deductible

under section 212 as expenses attributable to property held for

the production of income.   Respondent argues that all of these

amounts are nondeductible capital expenditures, except for the

portion of legal expenses allocable to Oakland 2.5   We agree with

petitioner.

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

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.    To qualify as an allowable

deduction under section 162(a), an item must (1) be paid or



      5
       The parties stipulated allocating 50 percent of the
$90,392 at issue to Oakland 2.
                               -17-

incurred during the taxable year, (2) be for carrying on any

trade or business, (3) be an expense, (4) be a necessary expense,

and (5) be an ordinary expense.   Commissioner v. Lincoln Sav. &

Loan Association, 403 U.S. 345, 352 (1971).   The principal

difference between classifying a payment as a deductible expense

or a capital expenditure concerns the timing of the taxpayer’s

recovery of the cost.   See INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 83-84 (1992); Interstate Transit Lines v. Commissioner,

319 U.S. 590 (1943); Lychuk v. Commissioner, 116 T.C. 374 (2001);

Metrocorp, Inc. v. Commissioner, 116 T.C. 211 (2001).

     Just because a particular expense fits within the literal

language of section 162, it does not automatically become

deductible.   This is because other sections, such as section 261,

except certain payments from the current deductibility

provisions.   INDOPCO, Inc. v. Commissioner, supra at 84.     Section

261 states that “no deduction shall in any case be allowed in

respect of the items specified in this part”, e.g., Part IX,

Items Not Deductible.   Section 263(a)(1), which is contained in

Part IX, generally provides that a deduction is not allowed for

"Any amount paid out for new buildings or for permanent

improvements or betterments made to increase the value of any

property or estate."

     As we recently noted in Lychuk v. Commissioner, supra at

386, the Supreme Court’s mandate as to capitalization requires
                                 -18-

that an expenditure be capitalized when it (1) creates a separate

and distinct asset, (2) produces a significant future benefit,

or (3) is incurred “in connection with” the acquisition of a

capital asset.    See also Commissioner v. Idaho Power Co., 418

U.S. 1, 13 (1974); Woodward v. Commissioner, 397 U.S. 572, 575-

576 (1970).    If any of the three conditions is met, an expense

may not be deducted and must be capitalized.

     Here, the correct legal framework in determining whether the

disputed legal fees are deductible is the origin of the claim

test.   United States v. Gilmore, 372 U.S. 39 (1963).    In order

for these fees to be deductible, the origin of the claim in the

underlying action must be proximately related to petitioner’s

trade or business.     Kornhauser v. United States, 276 U.S. 145

(1928).   The origin of the claim test is factual, and the factors

to be considered include:    (1) Allegations in the complaint,

(2) the legal issues involved, (3) the nature and objectives of

the litigation, (4) the defenses asserted, (5) the purposes for

which the amounts claimed as deductible were expended, and

(6) the background of litigation and all facts pertaining to the

controversy.     Boagni v. Commissioner, 59 T.C. 708, 713 (1973).

     The first disputed fee, $770, relates to Oakland 3.    The

complaint by Pomeroy in this case alleged that petitioner, in his

capacity as president of H.K. Peach, had seized control of the

corporation and had operated the corporation “as his private
                              -19-

fiefdom,” to the exclusion of Pomeroy.   The complaint alleged

further that petitioner, in his capacity as a director, officer,

and shareholder of H.K. Peach, “has engaged in a course of action

constituting illegal, fraudulent, willfully unfair and oppressive

acts”, including the establishment of certain bank accounts,

purportedly authorized by the board of directors of H.K. Peach,

the fact of which authorization was denied by Pomeroy.     Remedies

sought by Pomeroy included attorney’s fees, “appropriate

damages”, recovery of the misappropriated funds on behalf of H.K.

Peach, and dissolution and liquidation of the assets and business

of H.K. Peach.

     Applying the test of Commissioner v. Lincoln Sav. & Loan

Association, supra, we find that this fee (1) was paid or

incurred during 1995, (2) was incurred in connection with

carrying on petitioner’s trade or business, (3) was an expense,

(4) was a necessary expense in that petitioner was required to

defend himself in a lawsuit, and (5) was an ordinary expense in

that litigation expenses commonly arise in the course of

conducting business. Therefore, petitioner may deduct the fee in

question if no other limitations, such as section 263, indicate

that capitalization is required.

     The “origin of the claim” test yields the same result.    In

Oakland 3, the origin of the claim was Pomeroy’s allegations that

petitioner had breached his fiduciary duty and mismanaged the
                               -20-

entities.   Petitioner’s defense was no more than an attempt to

preserve the status quo; namely, to defend his business practices

against those allegations and to preserve his already established

position within H.K. Peach.   Petitioner did not attempt to create

a separate or distinct asset, produce a significant future

benefit, or acquire a capital asset.   See Lychuk v. Commissioner,

supra.   To the extent that any benefit was created by virtue of

petitioner’s defending this lawsuit, it appears to us more

immediate than future, in that an imminent harm to petitioner

would ensue if he failed to defend himself in this proceeding.

     Respondent relies exclusively on Lin v. Commissioner, T.C.

Memo. 1984-581, to support his assertion that these fees must be

capitalized.   There, the legal fees related to two proceedings.

The first proceeding concerned a dispute as to the ownership and

management of two corporations.   The second proceeding concerned

a dispute to set aside a deed as fraudulent and void.   The Court

concluded that the origin of the claim in the first proceeding

was to “protect or defend * * *[the taxpayers’] proportionate

interest in the ownership of the stock of the corporations”, and

in the second proceeding was to restore and establish the

taxpayers’ right to the ownership of the property in question.

We find Lin distinguishable on its facts and hold that the legal

fees related to Oakland 3 are deductible as ordinary and
                                -21-

necessary business expenses incurred in the course of

petitioner’s trade or business.

     The second portion of the disputed legal expenses, $90,392,

was incurred by petitioner with respect to Oakland 1 and Oakland

2.   Oakland 1 was brought against Pomeroy and others, and

involved claims of diversion of Arbor funds to Pomeroy’s own

management company, failure to pay to Arbor the management fees

to which it was entitled, and breach of fiduciary duty.    The

remedies sought in that proceeding included restitution and

exemplary damages.    Claims in Oakland 2 focused on the alleged

breach of fiduciary duty by petitioner and Pomeroy, and their

purported financial manipulation of Crittenton through “corporate

instrumentalities” which included H.K. Peach, Arbor, and PNC.

This proceeding also involved claims of failure to pay rent on

the part of PNC and failure to make partnership contributions by

H.K. Peach.

     For reasons similar to those described above as to the $770,

we conclude that the Lincoln Sav. & Loan Association test has

been met as to the $90,392.    Our analysis of the origin of the

claim test here is also similar to that of the fees relating to

Oakland 3.    We find that in Oakland 1, petitioner’s position

originated from his desire to negate the claims of breach of

fiduciary duty and diversion of fees.    In addition, he

counterclaimed against Pomeroy under the same theories.
                                -22-

Regardless of the success of those claims, petitioner did not

seek to create a separate or distinct asset, produce a

significant future benefit, or acquire a capital asset.     Again,

to the extent a benefit inured to petitioner by virtue of

defending and counterclaiming in this lawsuit, it appears to us

more immediate than future, in that an imminent harm to

petitioner would ensue if he failed to defend himself in this

proceeding.

     Examination of the fees incurred in Oakland 2 yields the

same result.   Those fees were (1) paid or incurred during 1995,

(2) incurred in connection with carrying on petitioner’s trade or

business, (3) an expense, (4) a necessary expense in that

petitioner’s participation in the lawsuit was mandated by virtue

of claims brought against him, and (5) an ordinary expense in

that businessmen such as petitioner, who are actively and closely

involved in a trade or business, are subject to litigation and to

incurring the associated expenses.     As for the origin of the

claim in Oakland 2, we do not find the claim to have sought to

create a separate or distinct asset, produce a significant future

benefit, or acquire a capital asset.

     Again, respondent argues that the similarity of these claims

to those in Lin v. Commissioner, supra, dictates the conclusion

that the fees at issue in Oakland 1 and Oakland 2 must be

capitalized.   We disagree.   Just as we observed with respect to
                               -23-

the Oakland 3 proceeding, neither Oakland 1 nor Oakland 2

involved a dispute as to the validity of ownership interests, or

involved a claim to set aside a fraudulent conveyance, as in Lin

where the Court concluded that the origin of the claim was to

protect, defend, or restore the taxpayers’ interest in the stock

of the corporations or in other property.    Instead, the claims in

the proceedings at issue can best be characterized as breach of

contract claims.   The legal expenses incurred by petitioner to

defend against such claims constitute an ordinary and necessary

expense of conducting petitioner’s trade or business.    The

proceedings in which he incurred those expenses did not relate to

protecting, defending, or restoring petitioner’s interests in the

companies he owned.

     Respondent also notes that Oakland 2 involved a claim for

failure to make partnership contributions.   Citing section 741

and Commissioner v. Shapiro, 125 F.2d 532 (6th Cir. 1942), affg.

a Memorandum Opinion of the Board of Tax Appeals, which allegedly

treat a partnership interest as a capital asset, respondent

concludes that the legal expenses in Oakland 2 must be

capitalized to the extent that they related to an issue of

partnership contribution in that they created or enhanced a

capital asset.   Respondent’s references to section 741 and

Shapiro are misplaced.   Both authorities deem a partnership

interest a capital asset solely for disposition purposes.      By
                                -24-

contrast, the issue of disposition does not arise in Oakland 2.

Therefore, we disagree that on that basis, petitioner must

capitalize these expenses.    We hold that they are deductible

under section 162(a), just like the other legal fees incurred by

virtue of Oakland 2.

    The last segment of the legal expenses at issue pertains to

1996.   That amount ($57,799) was incurred during that year by

petitioner in connection with Oakland 1, Oakland 2, Oakland 3,

Oakland 4, and Oakland 5.    As we have already discussed the

deductibility of the litigation expenses relating to the first

three proceedings and find the reasoning equally applicable here,

we focus our analysis on the fees relating to Oakland 4 and

Oakland 5.

     Petitioner brought the Oakland 4 suit individually and as a

shareholder of REH1.   The suit included claims for breach of

fiduciary duty by Pomeroy and others, by virtue of their managing

the affairs of REH1 to the exclusion of petitioner and to the

possible detriment to REH1.    Petitioner sought the appointment of

a receiver for REH1 and damages for failure to account for and

distribute corporate profits to petitioner and REH1.

     In Oakland 5, petitioner was forced to defend against

Pomeroy and others who were trying to compel the surrender of his

interest in TROY-SAK pursuant to the terms of the TROY-SAK

partnership agreement.   In response to petitioner’s earlier
                                -25-

action for dissolution of TROY-SAK and motion for preliminary

injunction to arrest the development of this proceeding, the

plaintiffs in Oakland 5 sought a court order compelling

petitioner to transfer his partnership interest in TROY-SAK to

them, so as to achieve the termination of the partnership on

their terms.

     Under the Lincoln Sav. & Loan Association test, the fees in

Oakland 4 were (1) paid or incurred during 1996, (2) incurred in

connection with carrying on petitioner’s trade or business, (3)

an expense, (4) a necessary expense in that petitioner was

fulfilling his fiduciary duty by bringing the lawsuit, and (5) an

ordinary expense in that breaches of fiduciary duty are not

uncommon in business affairs.   Furthermore, the claims in this

proceeding did not have as their origin the creation of a

separate or distinct asset, production of a significant future

benefit, or an acquisition of a capital asset.    Petitioner

instead sought to enforce the fulfillment of the fiduciary duty

owed to REH1 by Pomeroy and others.    We conclude that the fees

relating to Oakland 4 are deductible under section 162(a).

     Further, we find the fees relating to Oakland 5 to have been

(1) paid or incurred during 1996, (2) incurred in connection with

carrying on petitioner’s trade or business of developing real

estate as they relate to his involvement with TROY-SAK, (3) an

expense, (4) a necessary expense in that petitioner was required
                                -26-

to defend himself in a lawsuit, and (5) an ordinary expense in

that souring of business relationships between the partners is a

routine business reality.    See Commissioner v. Lincoln Sav. &

Loan Association, 403 U.S. 345 (1971).    Under these standards, we

find    petitioner’s expenses incurred in connection with Oakland 5

deductible because he did not seek to create a separate or

distinct asset, produce a significant future benefit, or acquire

a capital asset in that proceeding.    Instead, he was defending

his position as a partner with respect to the contractual

obligations specified in the partnership agreement.

       In view of the above, we hold that petitioner may deduct the

legal fees in the amounts of $770 and $90,392 for 1995 and

$57,799 for 1996.

V.     Office Expenses

       For 1995, petitioner deducted $14,065 of office expenses as

expenses paid in carrying on his trade or business.    Petitioner

and some of the Arbor employees worked in the office.     Evidence

in the record supports the conclusion that Arbor was an

“umbrella” entity organized to develop and manage industrial real

estate and nursing homes owned by petitioner and his co-

venturers.    The office in question was used by petitioner to

house Arbor’s intended business activities.    The expenses at

issue are those of Arbor, not those of petitioner.    Thus, he

cannot deduct the fees at issue under section 162.
                               -27-

     Nor do we find any evidence of payment of rent by Arbor to

petitioner, so as to justify writing off the office expenses by

him personally, in his capacity as a landlord, under section 212.

Sec. 1.212-1(h), Income Tax Regs. (second sentence).    As

enunciated by the Supreme Court, the “doctrine of corporate

entity” fills a useful purpose in business life, and whether the

purpose be to gain an advantage under law of the State of

incorporation, so long as that purpose is the equivalent of

business activity, the corporation remains a separate taxable

entity.   Moline Props., Inc. v. Commissioner, 319 U.S. 436, 438

(1943).

     Short of disregarding the corporate integrity of Arbor for

petitioner’s benefit, we see no basis for allowing petitioner to

personally expense Arbor’s office costs.    We hold that the

$14,065 of office expenses may not be deducted by petitioner.

     We have considered all arguments of the parties related to

our holdings set forth herein and, to the extent not discussed

herein, find those arguments to be irrelevant or without merit.



                                           Decision will be entered

                                      under Rule 155.
