Yes, you may be correct depending on the type of lawsuit it is.. In researching this topic, this area is gray to say the least. This reference from the Tax Advisor does say though" that he proper tax treatment of a recovery or payment from a settlement or judgment is determined by the origin of the claim. In applying the origin-of-the-claim test, some courts have asked the question "In lieu of what were the damages awarded?" to determine the proper characterization (see, e.g., Raytheon Prod. Corp., 144 F.2d 110 (1st Cir. 1944))". The proper characterization can be interpreted if the expenses are directly related to acquiring, improving, or constructing a capital asset. If so, then the expenses should be capitalized.
In researching various sources, a rule of thumb should be followed. If the lawsuit settlement expenses are directly related to acquiring, improving, or constructing a capital asset, they should be capitalized. This is consistent to the origin of claim concept whereas if all expenditures for capital expenditures are capitalized, so should settlement expenses from CAPEX lawsuits.
However if the lawsuit settlement expenses are not directly related to the acquisition, improvement, or construction of a capital asset, they should be expensed in the period incurred. For example, if the lawsuit pertains to operational issues, such as breach of contract or employee-related matters, then these could be expensed.
In my previous answer, the examples I gave were indirect expenses that could be expensed rather than capitalized. The key caveat on whether the type of settlement involved direct or indirect expenses.
@NYCMIKE1234
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