Seeking Consistency in Relating Capital to Current Expenditures‪.‬

I. INTRODUCTION The court in Gilmore v. United States (1) permitted the taxpayer to capitalize litigation expenditures attributable to protecting the title of corporate shares in a divorce action. Although consistent with a line of decisions holding that taxpayers must capitalize the litigation expenditures they incur in defending their title to property, (2) the decision is troubling because it confuses a taxpayer's income-producing and personal tax worlds. The ruling in Gilmore followed remand from the Supreme Court, where the taxpayer had argued for the deductibility of the expenditures and lost. (3) The taxpayer lost because the expenditures were personal, (4) not because the litigation expenditures were capital expenditures, although that also may have been true. The Supreme Court rejected the taxpayer's argument that the expenditures were deductible in his trade or business because he defended the divorce suit to protect his corporate ownership, not to resist dissolution of his marriage. (5) The Court held that the origin and nature of the claim controlled the tax characterization of the expenditures and that dissolution of the marriage was a personal matter unrelated to income production or to the taxpayer's trade or business. (6) Accordingly, the taxpayer could not deduct expenses incurred in defense of a claim for dissolution regardless of his motivation for defending the claim. (7) Nevertheless, on remand, the district court permitted the taxpayer to increase his basis in the shares he had sought to protect by the amount of his litigation expenditures. (8) The shares related to his trade or business and to his income-producing activities.