JAD wrote:Client is suing builder for construction defects. Costs of suit are being capitalized. I have not found guidance on the treatment of those costs once suit is settled. I think that the costs of the suit plus the net costs paid by my client should be depreciated over 39.5 years. I think that depreciation should not begin until the lawsuit is settled, because it is possible that client will be reimbursed for all fees. Agree? Disagree?
I agree with your position on the fees being capital in nature. I concur with holding off on the "placed in service" date, but I think my reasoning is different from yours.
I don't think a potential future reimbursement is the issue. The fees are your client's expenses in the present absent compelling evidence to the contrary, such as the pre-existence of a reimbursement arrangement (e.g., an accountable plan). Rather, I think the placed in service date would depend on whether the purpose of the suit is to get the defects corrected or to recover money already expended in correcting the defects. If the former, we would wait until the correction is complete to place it in service, at which point the net cost to the taxpayer (if any) would be depreciated. If the latter, we would wait to see what money is recovered and treat the amount in excess of the legal fees as a return of capital on the corrections, which we would have already placed in service at that point. If there is no excess, then the net expenditure would revert to being treated as incurred with respect to the corrections and thus be placed in service at that time.
In the event that the fees are for the purpose of correcting the defects, perhaps your client can avoid capitalization using the de minimis safe harbor election?