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 paragraph 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.
About Julian Block
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” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.