A. Leroy and Pearl E. Nelson, Petitioners, v. Commissioner of Internal Revenue, Respondent, 472 F.2d 1224 (9th Cir. 1973)

Taxpayers appeal a Tax Court judgment denying a deduction of $22,000 as an ordinary business expense. The expense came when the taxpayers sold their loan business and then paid $20,000 to the purchaser and $2,000 in attorney fees for a release from their warranty liability on certain outstanding loans.

While the Tax Court correctly treated the $20,000 payment as an attempt to salvage capital, the $2,000 attorney fee was not so clearly a capital expense. A case could have been made for allowing the $2,000 to be deducted from ordinary income. However, the taxpayers had the burden of proving that the attorney fee was an ordinary business expense, and their trial strategy, apparently, was to lump the $20,000 and the $2,000 together. Originally, they sought to deduct $22,000 as "professional fees." On this record, we cannot say that the trier of fact had no substantial evidentiary basis for finding against the taxpayers on the fee as well as on the price paid for the release.

Affirmed.