Blue J: Deducting Legal Expenses In Mylan

Benjamin Alarie (Osler Chair in Business Law, University of Toronto; CEO, Blue J Legal) & Kim Condon (Senior Legal Research Associate, Blue J Legal), Deducting Legal Expenses: Unpacking the IRS's Appeal in Mylan, 176 Tax Notes Fed. 1419 (Aug. 29, 2022):

In this article, Alarie and Condon use machine-learning models to evaluate the strength of the IRS’s argument that the Tax Court in Mylan [v . Commissioner, 156 T.C. 137 (2021)], erred in holding that a generic drug manufacturer is not required to capitalize litigation expenses incurred in defending against patent infringement suits and instead may deduct them as ordinary and necessary business expenses.

Conclusion
The ability to deduct the entirety of an expense in the current year is a powerful tax incentive that has significant implications for taxpayers’ business strategies. From the perspective of the IRS, this can make business deductions a tempting target for reassessment. Tax planners are well advised to pay close attention to the language of the regulations when classifying an expense. When it comes to both planning and litigation, tax practitioners can leverage machine-learning algorithms to solidify their positions and hone their arguments by quantifying the strength of their positions and highlighting the most salient factors. As noted, the IRS has taken an aggressive stance in appealing the Tax Court’s decision on the deductibility of litigation expenses in its appeal of Mylan. We will see in the coming months whether this strategy is successful. It appears that the taxpayer has the stronger position in this dispute. However, a ruling for the IRS could pay off significantly in increased revenue for the treasury for many years to come.

Prior TaxProf Blog coverage:

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• Blue J Predicts With 68% Confidence That IRS's Economic Substance Challenge Will Fail In District Court Perrigo Case (Aug. 6, 2021)
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• Blue J Predicts With 74% Confidence That 8th Circuit Will Find Customary/Usual Management Fees Are Deductible Under § 162 (Nov. 3, 2021)
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