Wednesday, September 24, 2008
Henry M. Ordower (Saint Louis) has posted Seeking Consistency in Relating Capital to Current Expenditures, 24 Va. Tax Rev. 263 (2004), on SSRN. Here is the abstract:
The court in Gilmore v. United States permitted the taxpayer to capitalize his litigation expenditures to the corporate shares he sought to protect. Although consistent with a line of decisions holding that taxpayers must capitalize, rather than deduct as ordinary and necessary business expenses or expenses of income production, the litigation expenditures they incur in defending their title to the property, the decision is troubling because it confuses a taxpayer's income producing and personal tax worlds. The ruling followed remand from the Supreme Court where the taxpayer argued deductibility of the expenditures and lost, not because the litigation expenditures were capital expenditures, although that also may have been true, but because the expenditures were personal. The Supreme Court rejected the taxpayer's argument that he defended the suit for divorce only to protect his corporate ownership, and not to resist dissolution of the marriage, so that the expenditures were deductible in his trade or business. The Court held that the origin and nature of the claim controlled the tax characterization of the expenditures. Dissolution of marriage was a family and personal matter unrelated to income production or taxpayer's trade or business. Accordingly, the taxpayer could not deduct expenses incurred in defense of a claim for dissolution regardless of the taxpayer's motivation for defending. Nevertheless, on remand, the district court permitted the taxpayer to increase his basis in the shares he had sought to protect by the amount of the litigation expenditures. The shares related to his trade or business and his income producing activities.