## Facts

- Entrepreneur and real-estate venturer S. N. Goldman died leaving two children, Alfred D. Goldman and Monte H. Goldman.
- After S. N.’s death, Alfred and Monte jointly owned S. N.’s business interests (the “Goldman business entities”), and Alfred managed those interests for years with Monte’s consent.
- The brothers later began disputing their relative rights to the entities’ assets and cash flow. Alfred claimed he was entitled to more because he managed the investment properties and because Monte had withdrawn about $11 million more than Alfred over time.
- Alfred placed Monte on an $8,000 monthly allowance even though the Goldman business entities were generating roughly $4 million per year.
- In March 1990, Monte demanded (i) an accounting of entity funds, (ii) the right to inspect books and records, and (iii) distribution of 50% of all income and profits.
- After Monte’s demand, Alfred transferred roughly $23 million in cash from the Goldman business entities to himself through foreign bank accounts and other transactions.
- Alfred also caused the Goldman business entities to convey 29 properties to a revocable living trust in Alfred’s name.
- Monte sued Alfred in Oklahoma state court and obtained a restraining order directing Alfred to return certain property; the state court also appointed a receiver over the Goldman business entities.
- Alfred counterclaimed, seeking an accounting and recognition of his title to certain properties.
- The dispute settled in 1994 after approximately $3 million in legal and accounting fees were incurred in the state-court litigation.
- A Subchapter S corporation in which Alfred and Monte were shareholders deducted the litigation-related legal and accounting fees as business expenses on its 1990–1992 federal income tax returns.
- The IRS disallowed most of the deductions. After Alfred and Monte died, Arthur Mires and other trustees/representatives of Goldman-related trusts and estates sued the United States for tax refunds, alleging the IRS wrongly denied the deductions.
- The parties filed cross-motions for summary judgment on whether the disputed fees were deductible.

## Issues

1. Under the “origin of the claim” test, did the state-court litigation expenses arise from carrying on a trade or business so as to be deductible as “ordinary and necessary” business expenses under I.R.C. § 162(a)?
2. Or did the expenses arise from an ownership/title and division-of-property dispute between co-owners, making the costs nondeductible currently (including as capital or personal expenses)?

## Decision

- The court granted the United States’ motion for summary judgment and denied the trustees’ motion.
- Applying the origin-of-the-claim test, the court concluded the state-court litigation stemmed primarily from a family/co-owner conflict over ownership, control, and division of inherited business assets and related distributions.
- Because the litigation’s source was an ownership and property-rights dispute (not ordinary operating activity of a trade or business), the disputed legal and accounting fees were not deductible under § 162(a) as current business expenses.
- The IRS’s disallowance of the contested deductions was upheld, and the trustees were not entitled to the claimed refunds for 1990–1992.

## Legal Principles

- Whether litigation expenses are deductible depends on the origin and character of the claim giving rise to the expense, not on the expense’s financial effects on the taxpayer.
- Expenses incurred to acquire, perfect, determine, or defend ownership/title to property are generally capital in nature and are not currently deductible as “ordinary and necessary” business expenses under § 162(a).
- A dispute between shareholders or co-owners over who owns what, how property should be titled, and how profits should be divided is typically not an expense of operating the underlying business, even if the disputed assets are used in that business.
- When the material facts bearing on the origin of the litigation are not genuinely disputed, deductibility may be resolved on summary judgment as a matter of law.

## Conclusion

In this tax refund action, the court treated the Goldman brothers’ state-court fight as an ownership-and-division dispute rather than day-to-day business litigation, so most related professional fees could not be deducted as § 162 business expenses for 1990–1992, and the requested refunds were denied.


Mires v. United States, 372 F. Supp. 2d 1265 (2005)