Out of court settlement (property)

[ILLMAS]

I had previously posted a question in regards to increase in basis, if you skipped my previous question here it is: 

Now that we a have a copy of the legal documents, the above is still true, however the settlement document does not mention anything about the property and its basically says both parties agrees to settle for $200K, leave each other alone and case closed.  My new question, can anyone point me to any IRS reference/tax court case to show the TP why they dont get any benefit, increases/decreases their basis or can be expensed.  Unfortunately I have not been able to find a similar case online.

 

Thanks

[jklcpa]

Here's an older article from The Tax Advisor that covers the part  of your original question about whether the legal fees are deductible or not. 

The article discusses the concept of "origin of the claim" test to determine whether legal fees are an above- or below-the-line item of expense, when they might be deductible, or if they must be added to basis. Under the heading "Capitalize or Expense", it says that If the legal fees have their origin in the  ownership or protection of the property they should be capitalized.  The first example that follows is similar to your scenario where a person had to defend title to his rental property, and this article says that  legal expense should be added to basis, and it cites code sec 263.  

ETA - deduction is specifically disallowed under sec 1.212-1(k).

 

 

Edited March 12, 2018 by jklcpa
added link to code

[ILLMAS]

1 hour ago, jklcpa said:

Here's an older article from The Tax Advisor that covers the part  of your original question about whether the legal fees are deductible or not. 

The article discusses the concept of "origin of the claim" test to determine whether legal fees are an above- or below-the-line item of expense, when they might be deductible, or if they must be added to basis. Under the heading "Capitalize or Expense", it says that If the legal fees have their origin in the  ownership or protection of the property they should be capitalized.  The first example that follows is similar to your scenario where a person had to defend title to his rental property, and this article says that  legal expense should be added to basis, and it cites code sec 263.  

ETA - deduction is specifically disallowed under sec 1.212-1(k).

 

 

Thanks Judy

[Abby Normal]

And apparently that legal fee deduction was killed in the new law:

https://www.forbes.com/sites/robertwood/2018/03/12/new-tax-on-lawsuit-settlements-legal-fees-cant-be-deducted/#693a8a1e70d7