Opinion ID: 408238
Heading Depth: 2
Heading Rank: 3

Heading: The Tax Court's Analysis

Text: 37 The Tax Court's opinion identifies the origin of the claim test as controlling and notes the Supreme Court's rejection of the primary purpose test. Keller v. Commissioner, at 1459-60. The Court then discusses the criteria to be used to determine the origin of the claim. It quotes, at page 1460, a restatement of the origin test from a prior Tax Court decision, Boagni v. Commissioner, 59 T.C. 708 (1973), which states that discovery of the origin requires consideration of the issues involved, the nature and objectives of the litigation, the defenses asserted, the purpose for which the claimed deductions were expended, the background of the litigation, and all facts pertaining to the controversy. Id. at 713 (emphasis added). 38 As the emphasis indicates, Boagni does not accurately state the origin test. In fact, the criteria listed would be more appropriate for determining the primary purpose of the litigation. This is inconsistent with the Supreme Court's rejection of the purpose test, and it reflects an improper merging of the attribution step with the ultimate characterization decision. 39 The Tax Court, using the Boagni criteria, applied what it called the origin of the claim test, and decided that the origin of Keller's tax action was in the minority stockholder's claim for rescission. Keller v. Commissioner, at 1461. 40 The Tax Court's application of the origin test was incorrect in two regards. First, a careful reading of Gilmore indicates that the claim at issue (the origin of which is to be identified) is not the tax claim, but the underlying claim that gave rise to the incurring of expense or income. (T)he deductibility of these (litigation) expenses turns ... not upon the consequences to respondent of a failure to defeat his wife's community property claims but upon the origin and nature of the claims themselves. Gilmore, 372 U.S. at 43-44, 83 S.Ct. at 626 (emphasis in original). 41 Thus, the Court stated that the tax character of the legal expenses turns on the origin and nature of the wife's community property claims. Id. In the instant case, the Tax Court examined the wrong claim. The claim to be studied is the claim that gave rise to the transaction that created the tax problem. The proper inquiry, then, is to the origin of the dissident shareholders' claim for rescission. Clearly that claim originated in the sale of the brewery. 42 The second error in the Tax Court's identification of the minority stockholder's claim for rescission as the origin of (Keller's) legal action, is that the court, as intimated earlier, applied the Boagni criteria and looked to the minority's objectives in filing the suit, rather than to the event that prompted them to sue. 43 If the Supreme Court had applied that analysis in Gilmore, the wife's objectives, i.e. to get control of the husband's corporations, would have been determinative. Instead, the Court rejected exactly that argument, 372 U.S. at 42, 44, 83 S.Ct. at 625, 626, and ruled that the tax treatment is found in the origin of the suit, not its possible consequences. Id. at 43-44, 83 S.Ct. at 626. In the present case, rescission is a consequence. 44 The Tax Court rejected the sale of the brewery as the origin of the claim. It stated that (t)he mere fact that the sale ... was first in the chain of events which led to the litigation is not controlling .... Keller v. Commissioner, at 1461. It cites Gilmore 's comments that the object of the origin test is to find that transaction from which the taxable event proximately resulted. Gilmore, 372 U.S. at 47, 83 S.Ct. at 628, quoting Kornhauser v. United States, 276 U.S. 145, 153, 48 S.Ct. 219, 220, 72 L.Ed. 505 (1928). 45 The Tax Court was correct in noting that the mere fact that the brewery sale was first in the chain of events leading to the tax dispute is not controlling. It is instead the fact that the brewery sale was the basis of the shareholders' derivative suit, which led to the tax dispute, that is controlling. 46 In short, a proper application of the origin test leads to the conclusion that the origin of the claim that gave rise to Keller's tax dispute was the June 1958 sale of the brewery.