Expenses of business litigation, and litigation involving the production or collection of income or of property held for the production of income, are typically deductible under Code Sections 162 or 212. It is often forgotten, however, that if the subject of litigation is the defense of, or to perfect title to, real or personal property, such expenses must be capitalized into the asset and not deducted. See Treas. Regs. §1.263(a)-2(e).
Fraudulent conveyance litigation involves a party asserting, or defending against, a claim that property was transferred from one person or entity to another to avoid the transferred property from being reached by creditors of a transferor. In a recent Chief Counsel Advice, the IRS concluded that the defense of a fraudulent conveyance claim by the transferee of property was in the nature of the “defense of real or personal property.” The litigation expenses of the defender had to be capitalized and could not be immediately deducted under Section 162.
Chief Counsel Advice 201552028