The Tax Court Addresses the Origin-of-the-Claim Doctrine and Legal Fees

Share this Article

Freeman Law is a tax, white-collar, and litigation boutique law firm. We offer unique and valued counsel, insight, and experience. Our firm is where clients turn when the stakes are high and the issues are complex.

The Tax Court Addresses the Origin-of-the-Claim Doctrine and Legal Fees

A recent Tax Court decision addressed the deductibility of legal expenses and the so-called “origin-of-the-claim” doctrine.  The Mylan decision demonstrates that the deductibility of a legal expense generally depends on the origin and character of the underlying claim or transaction out of which the legal expense was incurred. An expenditure, such as legal expenses, may be deductible in one setting but nevertheless required to be capitalized in another. Legal expenses directly connected with (or pertaining to) the taxpayer’s trade or business are deductible under I.R.C. Section 162 as ordinary and necessary business expenses, while expenses arising out of the acquisition, improvement, or ownership of property are capital expenditures under I.R.C. Section 263(a) and are not currently deductible.

Mylan, Inc. & Subsidiaries v. Commissioner, 156 T.C. No. 10| April 27, 2021 | Docket No. 26976-16 | Urda, J.

Short SummaryMylan, Inc. & Subsidiaries (“Mylan”) is a manufacturer of brand name and generic pharmaceutical drugs. To obtain Food & Drug Administration (“FDA”) approval for generic versions of brand name drugs, Mylan was required to provide a certification regarding the status of any patents that the FDA had listed as covering the respective brand name drug.

Mylan certified that listed patents covering the respective brand name drug were invalid or Mylan’s generic version would infringe on them. This type of certification automatically counts as patent infringement and often provokes litigation under 35 U.S.C. Section 271(e)(2). Mylan was required to send notice letters to the brand name drug manufacturer and any patentees stating that Mylan made this certification.

Mylan incurred legal expenses to prepare notice letters and to defend against patent infringement suits. On its 2012, 2013, and 2014 federal income tax returns, Mylan deducted its legal expenses as ordinary and necessary business expenditures.

Key Issues:

Primary Holdings:

Key Points of Law:

Insight: The Mylan decision demonstrates that the deductibility of a legal expense generally depends on the origin and character of the underlying claim or transaction out of which the legal expense was incurred. An expenditure, such as legal expenses, may be deductible in one setting but nevertheless required to be capitalized in another. Legal expenses directly connected with (or pertaining to) the taxpayer’s trade or business are deductible under I.R.C. Section 162 as ordinary and necessary business expenses, while expenses arising out of the acquisition, improvement, or ownership of property are capital expenditures under I.R.C. Section 263(a) and are not currently deductible.