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California’s antitrust suit. Respondent disallowed $1,074,867 of
deductions for legal fees claimed for the 1989 tax year and
disallowed separate deductions of $2,666,045 and $175,630 for
legal fees claimed for the 1990 tax year.
Discussion
The issue for decision is whether legal fees incurred in
connection with the State of California’s antitrust litigation
are deductible as ordinary and necessary business expenses under
section 162.2 Respondent determined that the legal fees must be
capitalized pursuant to section 263(a). Petitioner argues that
the legal fees were postacquisition expenditures incurred in
defending its business operations.
Income tax deductions are a matter of legislative grace, and
the burden of clearly showing the right to the claimed deduction
is on the taxpayer. See Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Moreover, deductions are
strictly construed and allowed only “as there is clear provision
therefor.” INDOPCO, Inc. v. Commissioner, supra at 84 (quoting
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)).
The principal difference between a deduction and an item
that must be capitalized and amortized is the timing of the
recovery of the expenditure. The Supreme Court in INDOPCO, Inc.
2Unless otherwise indicated, section references are to the
Internal Revenue Code applicable to the subject years, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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