DocketNumber: Docket No. 5553-95.
Citation Numbers: 107 T.C. 30, 1996 U.S. Tax Ct. LEXIS 34, 107 T.C. No. 3
Judges: TANNENWALD
Filed Date: 8/20/1996
Status: Precedential
Modified Date: 1/13/2023
*34 Decision will be entered for respondent.
Ps' principal residence was destroyed by fire. They recovered insurance proceeds based on replacement cost, resulting in a gain. Ps incurred legal fees in obtaining recovery of those proceeds and claimed a deduction for the amount of those fees paid during the taxable year. Ps assert that the insurance policy was held for the production of income so that the deduction is allowable under
*31 OPINION
TANNENWALD,
All section references are to the Internal Revenue Code in effect*35 for the year in issue.
All the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.
At the time their petition was filed, petitioners resided in Piedmont, California.
On October 20, 1991, petitioners' then principal residence in Oakland, California, (the Oakland Hills residence) was destroyed by a firestorm. Petitioners had lived in that residence continuously from the time they purchased it in 1967 until its destruction. The residence was not held either for rental or sale during 1991.
At the time of its destruction, the residence and its contents were insured against fire loss by Republic Insurance Company (Republic). The insurance policy provided that, in the event of a loss, petitioners were to receive the replacement cost of the residence.
On November 20, 1991, Republic made an interim payment to petitioners in an amount based on its adjuster's determination that the actual cash value of the home was $ 110 per square foot.
During 1991, petitioners engaged the services of McInerney & Dillon, P.C., Attorneys at Law (McInerney & Dillon), to resolve a conflict with Republic as to replacement cost. During 1991, *36 petitioners also hired a firm to draw plans for their home and to estimate the replacement cost of the Oakland Hills residence. Such replacement cost was estimated to be $ 921,994.
*32 On September 16, 1992, Republic increased its estimate of replacement cost to $ 200 per square foot and made a further payment to petitioners based on this estimate.
The terms of the Republic policy provided for a form of arbitration in the event of a dispute over the replacement cost of insured property. Pursuant to that procedure, petitioners and Republic each chose an appraiser, and the two appraisers chose an umpire. An appraisal hearing ensued over replacement cost, and a decision was reached that the replacement cost of the home was $ 825,000. During September 1993, Republic issued its check in full satisfaction of the remaining balance due upon petitioners' insurance claim.
In pursuing their claim with Republic, petitioners incurred legal fees with McInerney & Dillon of $ 71,044.61 during 1991, 1992, and 1993. Petitioners paid $ 25,000 of that amount during 1992, which they claimed as a miscellaneous deduction on their 1992 return.
At the outset, we note that we have no direct evidence that petitioners*37 realized taxable gain, i.e., an excess of the insurance proceeds over cost, from their receipt of replacement cost under the insurance policy. Sec. 1033(a)(2); see
The issue before us is whether petitioners are entitled to deduct the $ 25,000 legal fees under In the case of an individual, there shall be allowed as a deduction*38 all the ordinary and necessary expenses paid or incurred during the taxable year-- (1) for the production or collection of income;
Respondent contends that petitioners' home was not held for the production of income and, thus, the legal fees incurred by petitioners were incurred to recover a loss, not *33 for the production of income, and are therefore not deductible. Petitioners concede that their residence was not held for the production of income but contend that the insurance policy should be separated from the ownership of the residence and that, in this context, their expenses to recover full replacement cost of their residence fall within the purview of
The initial element in determining deductibility is the application of the "origin of the claim" doctrine articulated by the Supreme Court in
We are not prepared to accept petitioners' argument that we separate the insurance policy and the dispute*39 thereunder from petitioners' ownership of the residence, which was concededly a capital asset not held for the production of income. The policy was designed to reimburse petitioners against economic loss arising from the occurrence of defined contingencies, represented by the amount necessary to replace the residence. See, e.g.,
It is well established that expenses that are incurred in either the acquisition or disposition of a capital asset are nondeductible capital expenditures. Sec. 263; see
We also note that no part of the gain from such disposition of petitioners' residence appears on their 1992 return and indeed may never be includable in income if petitioners take advantage of the replacement provisions of section 1033, e.g., if petitioners die before disposing of the replacement home. See
Petitioners rely heavily on
We hold that the legal expenses represent capital expenditures nondeductible under section 263 and an offset against the gain represented by the insurance proceeds, none of which petitioners recognized in the taxable year before us.
1. No gain was reported on petitioners' 1992 return based on the payment received in that year. It appears that petitioners were waiting until the expiration of the applicable period in which to replace the residence without current recognition of gain. See sec. 1033(a)(2).↩
2. See also
United States v. Theodore Pate and Richard E. Pate, as Co-... , 254 F.2d 480 ( 1958 )
Ticket Office Equipment Company, Inc. v. Commissioner of ... , 213 F.2d 318 ( 1954 )
Towanda Textiles, Inc. v. United States , 180 F. Supp. 373 ( 1960 )
Casalina Corporation v. Commissioner of Internal Revenue , 511 F.2d 1162 ( 1975 )
Allied Fidelity Corporation, F/k/a, William E. Roe, Allied ... , 572 F.2d 1190 ( 1978 )
Central Tablet Manufacturing Co. v. United States , 94 S. Ct. 2516 ( 1974 )
United States v. Gilmore , 83 S. Ct. 623 ( 1963 )
Woodward v. Commissioner , 90 S. Ct. 1302 ( 1970 )
United States v. Hilton Hotels Corp. , 90 S. Ct. 1307 ( 1970 )