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Business Crimes BulletinFeaturesLitigation

Litigation Expense Deductibility: New Appellate Court Decision

By Daniel Mayo

The Fifth Circuit Court of Appeals recently issued a decision that explains some of the requirements for deducting litigation expenses. James A. Cavanaugh, Jr. v. Commissioner of Internal Revenue, No. 18-60299 (March 29, 2019). The facts of the case are bizarre, but the controlling legal principles are not.

In a nutshell, the taxpayer was the sole shareholder of a company that was a commercial cleaning franchisor (Company). In November 2002, the taxpayer traveled on vacation with his girlfriend and two employees of his company to the Caribbean island of St. Maarten, where he owned a home. One of the employees was a bodyguard and the other was a former girlfriend. On Nov. 28, 2002, the taxpayer's current girlfriend died at the residence, likely from a cocaine overdose. The family of the decedent sued the taxpayer and the Company for wrongful death, claiming they facilitated her access to and ingestion of the cocaine that led to her death.

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