Gobble Ceo

Date: January 25, 2012

To: Gobble’s CEO

From:

Re: Deducting costs incurred in a transaction that fails to go through

Facts

Gobble Corporation purchased 400 acres of land in Green City to build a private golf course and residences. The land cost $10,000,000 and the houses would sell for an average of $700,000. Believing the city’s general plan allowed for this development, Gobble spent in excess of $1,000,000 in fees, environmental studies, and approvals. Gobble’s development plan proposal was approved by the city council in a vote. Two months later the membership of the council changed and they decided to defeat the proposal plan. Gobble sued the city for unreasonably interpreting its planning documents and reversing its initial approval of the project, all to the grave detriment of Gobble. Litigation has cost $500,000 and taken almost two years.

Issues

1. Can Gobble deduct all the costs incurred in this transaction?

2. If so, can they also deduct the $10,000,000 paid for the land acquisition?

Conclusions

1. They can deduct the majority of the costs.

2. No, they cannot deduct the cost of acquiring the land.

Discussion

Ordinary and necessary business expenses are deductible under IRC Section 162 Gobble can deduct the attorneys’ fees and costs paid to its own attorneys. IRC Section 162(a) allows a deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. GILMORE, U.S. v, 11 AFTR 2d 758, 372 US 39, 83 S Ct 623, 9 L Ed 2d 570, 63-1 USTC ¶9285, 1963-1 CB 356 (US, 2/18/1963) states that the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the expense was “business” or “personal” within the meaning of IRC Section 162(a). W.F. Tellier, SCt, 66- 1 USTC ¶9319, 383 US 687, 86 SCt 1118 (1966)...