Legal Fees not Limited


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Deductions, Other

Legal Fees not Limited to Business

By: A.J. Cook

Legal fees are usually deductible for a business. But when are they deductible otherwise?

Elsie B. Gale sued her ex-husband to increase her alimony and won. The Internal Revenue Service disallowed her legal fees. These expenses grew out of her marital relationship, not a business. Even so, the tax judge explained, payments are generally deductible if paid to increase taxable income. Here the divorce court's decision increased Gale's income, so she gets the deduction.

The Moral: It's knot possible for the IRS to divorce a legal deduction.

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Frank Zielenzinski, a Phoenix firefighter, deducted his legal expenses after his conviction of narcotics possession.

He told the tax judge he tried to protect his wages because a felony conviction would get him fired.

The court said the litigation was unrelated to his job because his duties didn't include keeping narcotics.

The Moral: A legal brief that doesn't cover a job description will be hosed down.

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Jean Nidetch, founder and president of Weight Watchers International, disagreed with tactics of the board. With some maneuvering and help from her attorney, she reversed the policies and regained control.

The IRS said she gave too much weight to the legal fees. The judge disagreed and allowed the deduction. He said the lawyer helped protect her income source: her salary and income potential from her company stock.

The Moral: The scales of justice balance in favor of weighty matters.

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Orie Oden, florist shop owner, slandered her niece Adell Lawson. She told Lawson's prospective employer her niece was "not very stable" and used foul language, and hinted that Lawson stole from her.

Lawson won a defamation suit.

The IRS disallowed Oden's legal fees. Making disparaging remarks about a former employee was improper for the florist business.

The Moral: Deductions for loose-lipped florists will be nipped in the bud.

Planning tip: You generally deduct fees if a favorable outcome of the legal conflict would affect taxable income. The basis of the conflict, however, must be ordinary in the taxable activity.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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