This month in our Blue J Predicts column we examine the deduction of legal and litigation expenses in the context of the generic drug industry. We use the IRS's appeal from the Tax Court to the Third Circuit in Mylan¹ to explore whether legal and litigation expenses related to intellectual property are considered "ordinary and necessary" under section 162(a). We also unpack the circumstances in which litigation expenses incurred in patent infringement litigation must be capitalized under the relevant regulations. Finally, using commercially available software, we demonstrate how Blue J's machine-learning models can help to predict the likely outcome of whether a particular business expense is deductible.²
The Tax Court in Mylan rejected the IRS's position that expenses incurred in litigating patent disputes under the relevant specialized IP regime were capital expenditures. The IRS now seeks to have the decision remanded with instructions to disallow the deductions. As we will show, the IRS's position on appeal is aggressive. Our algorithms predict with over 95 percent confidence that the legal expenses at issue in Mylan would have been treated by the courts in the past as ordinary and necessary business expenses and, further, that the expenditures are unlikely to be treated as capital expenditures on appeal.
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Footnotes
1.Mylan v. Commissioner, 156 T.C. 137 (2021).
2. Visit bluej.com for more information.
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