Woodward v. Commissioner
Subject: Tax treatment of expenses incurred in appraisal litigation.
FACTS
Taxpayers owned/controlled majority of common stock in publishing corporation. They voted their controlling shares of the stock of the corporation in favor of perpetual extension of the charter. Minority voted against. Taxpayers attempted to negotiate purchase of the dissenting stockholder’s shares, agreement could not be reached on the shares real value. Taxpayers then brought an action in state court to appraise the value of the minority stock interest. Court fixed the value, taxpayers purchased shares from the minority at that value.
Taxpayers paid attorney’s, accountants’ and appraisers >$25,000 for services in litigation. On their income tax return, they claimed deductions for the expenses, stating: “ordinary and necessary expenses paid for the management, conservation, and maintenance of property held for the production of income” deductible under §212.
ARGUMENT
Taxpayers argue that the costs in question were property deducted b/c the legal proceedings did not directly involve the question of title to the minority stock, but was instead concerned solely with the value of the stock. (court rejects argument, states: the origin of the claim was in the process of the acquisition of the stock itself.)
RULES
1. Ask whether the origin of the claim that is litigated is in the process of the acquisition itself.
2. Costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures.
3. If an expense is capital, it cannot be deducted as ordinary and necessary, either as a business expense under §162 or as an expense of management, conservation or maintenance under §212.
APPLICATION
Court rejects a test that looks to the consequences of the litigation, and does not consider taxpayer’s motives or purposes in undertaking litigation, but examines the origin and character of the claim.
-Litigation was required to fix the price.
-The expenses incurred in that litigation were property treated as part of the cost of the stock which taxpayers acquired.
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Subject: Tax treatment of expenses incurred in appraisal litigation.
FACTS
Taxpayers owned/controlled majority of common stock in publishing corporation. They voted their controlling shares of the stock of the corporation in favor of perpetual extension of the charter. Minority voted against. Taxpayers attempted to negotiate purchase of the dissenting stockholder’s shares, agreement could not be reached on the shares real value. Taxpayers then brought an action in state court to appraise the value of the minority stock interest. Court fixed the value, taxpayers purchased shares from the minority at that value.
Taxpayers paid attorney’s, accountants’ and appraisers >$25,000 for services in litigation. On their income tax return, they claimed deductions for the expenses, stating: “ordinary and necessary expenses paid for the management, conservation, and maintenance of property held for the production of income” deductible under §212.
ARGUMENT
Taxpayers argue that the costs in question were property deducted b/c the legal proceedings did not directly involve the question of title to the minority stock, but was instead concerned solely with the value of the stock. (court rejects argument, states: the origin of the claim was in the process of the acquisition of the stock itself.)
RULES
1. Ask whether the origin of the claim that is litigated is in the process of the acquisition itself.
2. Costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures.
3. If an expense is capital, it cannot be deducted as ordinary and necessary, either as a business expense under §162 or as an expense of management, conservation or maintenance under §212.
APPLICATION
Court rejects a test that looks to the consequences of the litigation, and does not consider taxpayer’s motives or purposes in undertaking litigation, but examines the origin and character of the claim.
-Litigation was required to fix the price.
-The expenses incurred in that litigation were property treated as part of the cost of the stock which taxpayers acquired.
Support us by:
Checking out our amazing store on Etsy: http://www.bohobuttons.com
While in law school I traveled the world. Puerto Rico. Egypt. Israel. The Netherlands. All over the United States. Costa Rica. Panama... How, you ask? I found ways to make money on the side. One of those ways was hosting my apartment on AirBnB. If you have an extra room, this is a perfect way to make some extra cash.
Since law school, I have traveled to dozens of countries for pleasure with my family. It's not rocket science. You just need to know how to start some side hustles. Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood. Join now and get a free stock through this link: Join Robinhood and Get a Free Stock!
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