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Estate of Meade v. Commissioner

489 F.2d 161 (1974)

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Estate of Meade v. Commissioner

United States Court of Appeals for the Fifth Circuit
489 F.2d 161 (1974)

Facts

Joseph Meade and William King (taxpayers) were sole shareholders of Terrace Corporation, which was liquidated. The corporation distributed its assets proportionally to Meade and King, including an antitrust-litigation claim. Because the claim’s value was uncertain, the claim was not included on tax returns at the time of the distribution, and the liquidation remained an open transaction. Meade and King hired attorneys to pursue this claim, which was later settled. The settlement proceeds were reported as capital gains pursuant to the liquidation of the corporation. However, the amounts paid for legal fees and litigation expenses were deducted against ordinary income as expenses incurred for collection of income under § 212 of the Internal Revenue Code. The commissioner of Internal Revenue (defendant) disallowed the deductions and instead applied the expenses as an offset against the capital gains of the settlement proceeds because the expenses were incurred in disposition of a capital asset under § 263. Meade and King petitioned the United States Tax Court for a redetermination. The Tax Court ruled for Meade and King, and the matter ended up before the Fifth Circuit.

Rule of Law

Issue

Holding and Reasoning (Ainsworth, J.)

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Casebooks

Corporate and Partnership Tax

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