Spoiler alert: Go beyond this paragraph to read about a disputed deduction for investment expenses that was resolved by the Tax Court in favor of the taxpayer. Go to the last two paragraphs to find out why you should curb your post-2017 enthusiasm under the new tax law.
Long-standing rules allow deductions for costs incurred by individual stockholders in carrying on proxy fights, except where they engage in the fights for personal reasons rather than for producing or collecting income.
Moreover, the Tax Court has held that these rules apply to legal fees paid in anticipation of proxy fight that never took place because the dispute was comprised.
Here’s a case in point from more than four decades ago. Jean Nidetch was president and a director, as well as a major shareholder and founder, of Weight Watchers International. A dispute arose among Weight watchers shareholders over management policy, and a proxy battle was anticipated.
Nidetch had earlier placed a number of shares in Weight Watchers in two trusts for the benefit of her children. These trusts were managed by trustees who were friendly with the opposing group in the upcoming proxy contest and could use the shares to vote against Nidetech. To bolster her position, she brought legal proceedings to replace those trustees with persons friendly to herself. Ultimately, the dispute was settled without the necessity of a proxy contest.
The Tax Court concluded that the legal fees paid by Nidetch to replace the trustees qualified under Code Section 212 as expenses incurred to protect her dividend income from the corporation and to safeguard her job. The proxy contest that never came to pass wasn’t a factor.
“The preliminary steps taken in anticipation of a proxy fight preempted by settlement are incurred for the same purposes as those incurred in the initial stages of a dispute culminating in an actual proxy battle. To deny deductibility of the former, while according deductibility to the latter, would penalize those parties who are able to amicably settle their disputes,” the court wrote in its decision.
Turn with me now from Nidetch’s triumph in 1978 to the recently enacted Tax Cuts and Job Act. The legislation includes a provision that abolishes deductions for miscellaneous expenses claimed on Form 1040’s Schedule A. The deep-sixing (technically, a “suspension”) applies to returns filed for calendar year 2018 and subsequent years through 2025.
Miscellaneous expenses encompass a hodgepodge of items. The category includes expenses incurred by investors to produce or collect income.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes...