## Facts

- Terrace Corporation was wholly owned by Joseph Meade and William King.
- Terrace liquidated and distributed its assets to Meade and King, including a contingent antitrust cause of action.
- Because the claim’s value was uncertain at liquidation, the parties treated the liquidation as an open transaction and did not include a value for the claim in income then.
- Meade and King personally retained counsel and paid legal fees and litigation expenses to prosecute the antitrust claim.
- The antitrust case settled, and Meade and King received proceeds.
- They reported the settlement proceeds as capital gain attributable to the liquidation but deducted the litigation costs against ordinary income under I.R.C. § 212.
- The Commissioner disallowed the ordinary deduction and treated the costs as capital expenditures required to reduce the capital gain.

## Issues

1. Whether legal fees and litigation expenses incurred to prosecute and settle an antitrust claim received in a corporate liquidation are currently deductible under I.R.C. § 212.
2. Whether those expenses are capital expenditures under I.R.C. § 263 that must be capitalized and applied against capital gain realized from the claim’s settlement.

## Decision

- The Fifth Circuit reversed the Tax Court.
- The court held the antitrust claim was a capital asset received as part of the liquidation exchange for stock.
- The litigation expenses were capital expenditures incurred to realize the value of that capital asset.
- The expenses had to be capitalized and used to offset the capital gain from the settlement, not deducted against ordinary income.
- The case was remanded for further proceedings consistent with this characterization.

## Legal Principles

- Expenditures directly connected to acquiring, protecting, perfecting, or disposing of a capital asset are capital in nature and must be capitalized under I.R.C. § 263.
- I.R.C. § 212 does not allow a current deduction for expenses that, by their origin and character, are part of a capital transaction.
- The character of costs generally follows the character of the related proceeds; when proceeds are capital gain, closely related realization costs are treated as capital and reduce that gain.

## Conclusion

Because the shareholders’ antitrust claim was a capital asset received in liquidation, the legal and litigation costs of prosecuting and settling that claim were required to be capitalized and applied against the resulting capital gain rather than deducted as ordinary expenses under I.R.C. § 212.


Estate of Meade v. Commissioner, 489 F.2d 161 (5th Cir. 1974)