Litigation Expenses for Acquisition of Capital Assets must be Capitalized

Litigation expenses incurred by a company in resolving claims arising from a merger and acquisition were capital expenses and, therefore, not deductible as ordinary and necessary business expenses. Some of the company’s shareholders challenged the fairness of the terms of the transaction and the valuations of the companies and sought rescission of the transaction. Since the company settled the claims to preserve the transaction, the expenses arose out of the merger and acquisition, a capital transaction. The court rejected the company’s argument that the expenses were deductible ordinary and necessary business expenses because the company incurred them by honoring its indemnity obligation to its directors, who were accused of breach of fiduciary duty. However, the origin of claim test focuses on the substance of the claim giving rise to the expenses and the substance of the claim from which the expenses arose was a capital transaction.

Ash Grove Cement Co. v. United States, 11-2546-CM, 2013 WL 451641 (D. Kan. Feb. 6, 2013).


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