- 26 -
the production of income, (2) the management, conservation, or
maintenance of property held for the production of income, or (3)
the determination, collection, or refund of any tax. Taxpayers
must keep sufficient records to establish deduction amounts. See
sec. 6001.
Whether a litigation expense is deductible depends on the
origin and character of the claim for which the expense was
incurred and whether the claim bears a sufficient nexus to the
taxpayer’s business or income-producing activities. See Woodward
v. Commissioner, 397 U.S. 572 (1970); United States v. Gilmore,
372 U.S. 39, 44-45 (1963). Ordinary and necessary litigation
costs are generally deductible under section 162(a) when the
matter giving rise to the costs arises from, or is proximately
related to, a business activity. See Woodward v. Commissioner,
supra; Kornhauser v. United States, 276 U.S. 145, 153 (1928).
Litigation costs must be “attributable to a trade or business
carried on by the taxpayer” in order to be deductible as a
business expense. Sec. 62(a)(1); see Guill v. Commissioner, 112
T.C. 325 (1999).
The ascertainment of a claim’s origin and character is a
factual determination that must be made on the basis of the facts
and circumstances of the litigation. See United States v.
Gilmore, supra at 47-49. The most important factor to consider
is the circumstances out of which the litigation arose. See
Page: Previous 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 NextLast modified: May 25, 2011