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Making the Proper Deductions for Legal Expenses

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Mar 6th 2018
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IRS grouches are ever on the prowl for what they characterize as improper deductions for payments to attorneys. Many of these disputed write-offs wind up in the courts. For the most part, they side with the IRS on what’s deductible.

Let me refer you to a decision way back in 1965 in which the Tax Court dismissed a case of a company that made a deduction for legal expenses on behalf of its principal shareholder Clark Hartwell. Hartwell’s wife sought to acquire an interest in his stock, but the company, Hartwell Corporation, failed to contend that the wife suffered from mental illness and her interference would disrupt the company’s business.

There are other cases, too, in the ongoing tussle between the IRS and taxpayers. In another one, a drug-trafficking probe of the Phoenix Fire Department resulted in the conviction on possession charges of one of its firefighters. Personal conduct, not firefighting duties, caused him to shell out for defense fees, which is why the Tax Court denied his deduction. 

A carpenter’s union member fought a suit charging union officials with misappropriating funds. Because the suit was unrelated to his work as a carpenter, the court ruled he wasn’t entitled to any deduction.

The Tax Court also disallowed an airline passenger’s outlays to defend against criminal charges of threatening an airline crew and assaulting passengers. That the events occurred during a business trip was irrelevant.

Police lifted a driver’s license when they spotted a driver weaving while on the way home from a cocktail party and he balked at taking a sobriety test. Notwithstanding his inability to work without a license, a federal district court ruled that lawyer’s fees to fight the license suspension were nondeductible personal expenses.

Predictably, the Tax Court refused to go along with a New Yorker whose justification for deducting the cost of defending his wife on shoplifting charges was that she would have lost her job if jailed.

Similarly predictable was its unwillingness to allow a man to write off what he spent to successfully defend himself against a charge of murdering his sister-in-law. It was indifferent to the argument that the man’s business “would have been destroyed” had he been found guilty and sent to prison.

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). 

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