78 T.C. 910">*911 OPINION

Respondent determined deficiencies in petitioners' Federal income taxes as follows:

These cases have been consolidated for purposes of trial, briefing, and opinion.

After concessions by petitioners, 1982 U.S. Tax Ct. LEXIS 87">*89 the only issue is whether attorney's and accountant's fees and other legal expenses paid by petitioner in connection with certain litigation are deductible expenses pursuant to section 212¹ or are nondeductible capital expenditures.

The cases were submitted on facts that were fully stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by reference. The pertinent facts are as follows.

Petitioners William Wagner (hereinafter petitioner) and Evelyn Wagner, husband and wife, resided in Miami Beach, Fla., at the time they filed their petitions herein. Petitioners filed a joint Federal income tax return for each of the taxable years in issue with the Internal Revenue Service Center, Chamblee, Ga. Evelyn Wagner is a party herein solely by reason of filing a joint return for each of the taxable years in issue with her husband.

78 T.C. 910">*912 1982 U.S. Tax Ct. LEXIS 87">*90 Prior to November 27, 1972, petitioner owned 349,000 shares of common stock of Watsco, Inc. (hereinafter Watsco), a Florida corporation. Watsco was engaged in the design, manufacture, and sale of refrigeration components and tools, professional hair spraying systems, and roller bearings and wheels. Watsco stock was traded on the American Stock Exchange.

On November 27, 1972, petitioner agreed to sell 300,000 shares ²1982 U.S. Tax Ct. LEXIS 87">*91 of his Watsco stock to Albert H. Nahmad (hereinafter Nahmad) for $ 2,400,000. Of this amount, $ 700,000 was to be paid at the time of closing by certified check, while the remaining $ 1,700,000 was to be paid in 12 substantially equal quarterly installments of $ 141,674, plus interest at 6 percent per annum on the outstanding principal balance. The first of these payments was due 3 months from the date of closing. Nahmad thereafter assigned his interest in the November 27, 1972, purchase agreement to Alna Corp., a Panamanian corporation of which Nahmad was the principal officer. The closing date was specified in the purchase agreement to be no later than December 29, 1972, and in fact was closed on that date. ³

Prior to December 29, 1972, petitioner was the chief executive officer of Watsco. On that date, he resigned as chief executive officer, and entered into a consulting agreement with Watsco for a period of 6 years at an annual rate of compensation of $ 50,000 per year plus certain fringe benefits. In addition, petitioner agreed not to compete with Watsco for a period of 5 years.

On December 31, 1974, Alna Corp. and Alna Capital Associates, a limited partnership formed under the laws of the State of New York⁴ (hereinafter the plaintiffs), filed a lawsuit in the U.S. District Court for the Southern District of Florida naming petitioner and several others as defendants (hereinafter 78 T.C. 910">*913 sometimes referred to as the lawsuit). The complaint filed in connection with this lawsuit charged generally that the defendants had made material misleading statements to the plaintiffs and to Nahmad, and had failed to1982 U.S. Tax Ct. LEXIS 87">*92 disclose certain other information in connection with the sale of the Watsco stock. The complaint alleged that the acts, misrepresentations, and failure to disclose, complained of therein, constituted a violation by petitioner of section 10 of the Securities Act of 1934, and rule 10(b)-5, of the Securities and Exchange Commission (hereinafter SEC). The remedies sought in the lawsuit included, inter alia, (1) a complete recision of the purchase of stock from petitioner, and (2) compensatory damages of at least $ 1,500,000 and punitive damages of $ 1 million.

On January 31, 1975, petitioner filed an answer to the above complaint, including therein affirmative defenses and counterclaims. The counterclaims were (1) for the amount of $ 131,593.81, which petitioner alleged was the installment payment due on January 1, 1975, in respect of his1982 U.S. Tax Ct. LEXIS 87">*93 Watsco stock sale, and (2) for the amount of $ 566,670, which he alleged to be the remaining unpaid balance of the purchase price due in respect of such sale ⁵ (not including the amount claimed in count 1).

The plaintiffs filed an amended complaint and demand for jury trial on July 1, 1975. Petitioner filed his answer to the amended complaint on July 14, 1975, including therein affirmative defenses and counterclaims, which were essentially the same as in his original answer, filed on January 31, 1975.

On November 30, 1975, the district judge required the plaintiffs to make an election between the remedies sought in the pleadings. The plaintiffs elected to pursue their claim for money damages and waived their prayer for recision.

On 1982 U.S. Tax Ct. LEXIS 87">*94 December 23, 1977, Watsco terminated the December 29, 1972, consulting agreement with petitioner. Thereafter, on or about December 28, 1977, Watsco filed a lawsuit against 78 T.C. 910">*914 petitioner in the Circuit Court for the Eleventh Judicial Circuit, Dade County, Fla., alleging fraud, misrepresentation, and deceit in connection with their consulting agreement. Watsco sought recision of that agreement as well as compensatory and punitive damages. ⁶

During the taxable years 1975, 1976, and 1977, petitioner paid and deducted attorney's fees and other legal expenses incurred in connection with the lawsuit in the amounts of $ 61,431, $ 13,335, and $ 18,139, respectively. ⁷

1982 U.S. Tax Ct. LEXIS 87">*95 Respondent has disallowed these deductions in their entirety because he determined that the legal expenses were incurred as a result of a capital transaction rather than in a trade or business. ⁸

The issue for decision is whether expenses incurred in defending a lawsuit1982 U.S. Tax Ct. LEXIS 87">*96 wherein it was alleged that petitioner had made fraudulent representations and concealed certain information with respect to the sale of stock, in violation of the Securities Act of 1934 and rule 10(b)-5 of the SEC, are deductible expenses pursuant to section 212 or are nondeductible capital expenditures. ⁹

Petitioner claims that the legal expenses, and attorney's and accountant's fees (hereinafter collectively referred to as the litigation expenses) were paid for the "production or collection of income" within the meaning of section 212(1). ¹⁰ He asserts 78 T.C. 910">*915 that the stock sale to the plaintiffs was a completed transaction, and that in order to protect and collect his income, both from the sale of his stock and1982 U.S. Tax Ct. LEXIS 87">*97 from his consulting fees from Watsco, he had no recourse other than to defend the lawsuit.

Respondent claims that the litigation expenses were incurred in a dispute having its origin in the disposition of a capital asset, and are therefore nondeductible capital expenditures. He maintains that the real dispute in the lawsuit centered around what price the plaintiffs would ultimately have to pay for the 300,000 shares of Watsco stock purchased.

Section 212 provides for the deduction of all ordinary and necessary expenses paid or incurred during a taxable year, inter alia, "for the production or collection of income." The purpose of this section is to extend deductions previously allowed only in a "trade or business" context to certain nonbusiness situations. See Baier v. Commissioner, 63 T.C. 513">63 T.C. 513, 63 T.C. 513">517 (1975),1982 U.S. Tax Ct. LEXIS 87">*98 affd. 533 F.2d 117">533 F.2d 117 (3d Cir. 1976); Boagni v. Commissioner, 59 T.C. 708">59 T.C. 708, 59 T.C. 708">712 (1973). Likewise, the restrictions and limitations applicable to the deductibility of trade or business expenses are also applicable to the expenses covered by section 212. United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 372 U.S. 39">45 (1963).

One of the limitations to deductibility of expenses under section 212 is that capital expenditures are nondeductible. Sec. 263; ¹¹ see Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572, 397 U.S. 572">575 (1970); United States v. Hilton Hotels, 397 U.S. 580">397 U.S. 580 (1970); sec. 1.212-1(n), Income Tax Regs. These expenditures are added to "the basis of the capital asset with respect to which they were incurred, and are taken into account for tax purposes either through depreciation or by reducing the capital gain * * * when the asset is sold." ( 397 U.S. 572">Woodward v. Commissioner, supra at 574-575; see sec. 1016(a)).

1982 U.S. Tax Ct. LEXIS 87">*99 Expenses which are incurred in either the acquisition or disposition of a capital asset are considered capital expenditures. 397 U.S. 572">Woodward v. Commissioner, supra at 575; 397 U.S. 580">United States v. Hilton Hotels, supra at 585; sec. 1.263(a)-2(a), Income Tax Regs. In determining whether litigation expenses are incurred 78 T.C. 910">*916 in the acquisition or disposition of property, or merely for the production or collection of income, the U.S. Supreme Court, in 397 U.S. 572">Woodward v. Commissioner, supra, adopted what has become known in tax parlance as the "origin-of-the-claim" test. See 397 U.S. 580">United States v. Hilton Hotels, supra.Therefore, our inquiry is whether the claim had its origin in the disposition of the Watsco stock, or in petitioner's attempt to collect income owed to him. In this regard, the proper focus is not upon petitioner's motive in undertaking a defense in the litigation, but, rather, upon the origin of the claim against petitioner. 397 U.S. 572">Woodward v. Commissioner, supra;372 U.S. 39">United States v. Gilmore, supra;Madden v. Commissioner, 514 F.2d 1149">514 F.2d 1149, 514 F.2d 1149">1151 (9th Cir. 1975),1982 U.S. Tax Ct. LEXIS 87">*100 revg. 57 T.C. 513">57 T.C. 513 (1972). ¹² Resolution of this question requires an 78 T.C. 910">*917 examination of all the surrounding facts and circumstances. 59 T.C. 708">Boagni v. Commissioner, supra at 713.

1982 U.S. Tax Ct. LEXIS 87">*101 In the lawsuit out of which the litigation expenses herein arose, the plaintiffs claimed that petitioner had violated the Securities Act of 1934 and rule 10(b)-5 of the SEC by making fraudulent representations and failing to disclose facts within his knowledge, thereby inducing them to purchase the Watsco stock for more than its true value. They initially sought both a recision of the purchase and a monetary judgment, but later abandoned their claim for recision. The essence of their claims 78 T.C. 910">*918 was that the agreed-upon price for the Watsco stock was excessive, and that such price should be modified. ¹³

1982 U.S. Tax Ct. LEXIS 87">*102 When a purchaser brings suit to determine the purchase price of a capital asset, the litigation expenses incurred therein are considered a part of his cost of acquiring that asset (see 397 U.S. 572">Woodward v. Commissioner, supra;397 U.S. 580">United States v. Hilton Hotels, supra), and when a seller brings suit to determine such price, the litigation expenses are a part of his cost of disposing of that asset. See also Soelling v. Commissioner, 70 T.C. 1052">70 T.C. 1052 (1978); Estate of Meade v. Commissioner, 489 F.2d 161">489 F.2d 161 (5th Cir. 1974), revg. a Memorandum Opinion of this Court.

Further, we have held that expenses incurred by a taxpayer in defending a lawsuit brought by the seller of certain stock, after that sale had been completed, were capital expenditures. In Locke v. Commissioner, 65 T.C. 1004">65 T.C. 1004 (1976), affd. 568 F.2d 663">568 F.2d 663 (9th Cir. 1978), the taxpayers were sued in Federal District Court for allegedly violating the Securities Act of 1934 and rule 10(b)-5 of the SEC in connection with the purchase of certain stock. In that case, we found1982 U.S. Tax Ct. LEXIS 87">*103 that the origin of the claim which formed the basis for the plaintiffs' (sellers) action was the taxpayers' allegedly fraudulent representations and concealments when purchasing the stock from the plaintiffs, and held that the legal expenditures incurred in defending the lawsuit had their origin in the acquisition of a capital asset and were therefore nondeductible capital expenditures. See Bradford v. Commissioner, 70 T.C. 584">70 T.C. 584 (1978).

We see no reason why the result should be different simply because the suit was brought by a purchaser rather than a seller. The origin of a claim is not determined by who brought the suit, but rather by the "'kind of transaction' out of which the litigation arose." (Citations omitted.) 59 T.C. 708">Boagni v. Commissioner, supra at 713. Indeed, as the Court of Appeals stated in Munson v. McGinnes, 283 F.2d 333">283 F.2d 333, 283 F.2d 333">336 (3d Cir. 1960), it would be "anomalous to require capitalization of expenses of the party who is on one side of a negotiation or controversy over the disposition of a capital asset while permitting the opposing 78 T.C. 910">*919 party to claim an ordinary deduction 1982 U.S. Tax Ct. LEXIS 87">*104 for his equivalent expenses." As a seller of stock, petitioner has incurred litigation expenses in defense of claims that he violated, inter alia, the Securities Act of 1934 and rule 10(b)-5 of the SEC when selling the Watsco stock. The plaintiffs claimed that too much had been paid for such stock, and a readjustment of the purchase price was sought. We think that the litigation expenses incurred by petitioner in defense of this claim had their origin in the disposition of the Watsco stock and are therefore nondeductible capital expenditures. See 283 F.2d 333">Munson v. McGinnes, supra; see also 65 T.C. 1004">Locke v. Commissioner, supra.¹⁴

1982 U.S. Tax Ct. LEXIS 87">*105 Petitioner has relied primarily on Naylor v. Commissioner, 203 F.2d 346">203 F.2d 346 (5th Cir. 1953), revg. 17 T.C. 959">17 T.C. 959 (1951), and Doering v. Commissioner, 39 T.C. 647">39 T.C. 647 (1963), affd. 335 F.2d 738">335 F.2d 738 (2d Cir. 1964). In 203 F.2d 346">Naylor v. Commissioner, supra, the taxpayer granted an option to purchase certain stock which was a capital asset in his hands, at a price based on the stock's net asset value shown on the books of the company on a certain date. The purchaser thereafter exercised the option, but a dispute arose as to the amount due under the sales contract. In resolving the dispute, the taxpayer incurred certain legal expenses which he sought to deduct as nonbusiness expenses incurred in the collection of income. The Court of Appeals found that the taxpayer's attorney was not employed until after an enforceable contract of sale existed, and held that the legal expenses were deductible as expenses incurred for the collection of income.

In 39 T.C. 647">Doering v. Commissioner, supra, the taxpayer was a shareholder in a corporation which1982 U.S. Tax Ct. LEXIS 87">*106 produced motion pictures for distribution. It contracted with another corporation for the latter to distribute and exhibit motion pictures produced by it. A dispute arose between the corporations over the amount 78 T.C. 910">*920 that the taxpayer's corporation was to receive under the contract. Before the dispute was settled, the taxpayer's corporation was liquidated, and its claim against the other corporation, which had no ascertainable value at that time, was distributed to the shareholders. The claim was ultimately settled, and the taxpayer deducted the legal fees incurred in connection with that settlement under section 212(1) as expenses incurred for the collection of income. Relying heavily on Naylor, we sustained the taxpayer, finding that since the liquidation was completed when the expenses were incurred, they were incurred for the collection of income. We also said that the deductibility of legal expenses depends on the purpose for which incurred.

Petitioner's reliance on these two cases, we believe, is misplaced. First, with respect to the Naylor case, we note that the propriety of that decision, in light of the Supreme Court decisions in 397 U.S. 572">Woodward v. Commissioner, supra,1982 U.S. Tax Ct. LEXIS 87">*107 and 397 U.S. 580">United States v. Hilton Hotels, supra, has been "considerably eroded." ¹⁵489 F.2d 161">Estate of Meade v. Commissioner, supra at 167; see Helgerson v. United States, 426 F.2d 1293">426 F.2d 1293, 426 F.2d 1293">1298 (8th Cir. 1970). Further, in Estate of Meade, which came from the same circuit as Naylor 21 years later, the Court of Appeals limited the holding in Naylor to factual situations wherein the disposition of a capital asset had been consummated, and the subsequent controversy concerns only the enforcement of the terms of the agreement. In the instant case, the origin of the claim out of which the expenses in question arose was a lawsuit brought by the plaintiffs essentially to modify the terms of the sale to reflect the true value of the stock. We do not view this controversy to be one of the enforcement of the terms of the sales agreement. See 283 F.2d 333">Munson v. McGinnes, supra.

1982 U.S. Tax Ct. LEXIS 87">*108 With regard to the Doering case, we note that that case was also decided before Gilmore, Woodward, and Hilton were decided and stated that "the deductibility of legal expenses depends on the purpose for which they were incurred." It also relied heavily on Naylor.

In view of the foregoing, we find that litigation expenses 78 T.C. 910">*921 incurred by petitioner had their origin in the disposition of the Watsco stock, and, therefore, we hold such expenses to be nondeductible capital expenditures.

Decisions will be entered for the respondent.