Attorney's Fees -Inheritance

[zeros]

Client and other siblings are disputing about the inheritance. Client has incurred some expense in dealing with this problem. Would this be deductible on schedule A?

[Gary2]

Will any of the inheritance be taxable to the beneficiaries? For example, a 401K or IRA that went to the estate, or whose beneficiary designation is being challenged? My recollection is that only legal fees relating to taxable income is deductible.

[Maribeth]

Will any of the inheritance be taxable to the beneficiaries? For example, a 401K or IRA that went to the estate, or whose beneficiary designation is being challenged? My recollection is that only legal fees relating to taxable income is deductible.

My recollection was that the fees were deductible if incurred for the "preservation of income". Master Tax guide references Reg. §1.212-1(k) and reads that legal expenses paid or incurred in recovering investment property and amounts of income includible in gross income are deductible. However, fees incurred in defending or perfecting title or in the acquisition or disposition of property are not deductible and must be capitalized.

Another reason why this board is so important. My "gut" reaction was that the fees would be deductible based on the "preservation of income" argument; yet in doing just a quick research on the issue I discover that the fees are probably not deductilbe. Again, more information is needed in order to make a decision.

Maribeth

[JohnH]

...Another reason why this board is so important. My "gut" reaction was that the fees would be deductible based on the "preservation of income" argument; yet in doing just a quick research on the issue I discover that the fees are probably not deductilbe. Again, more information is needed in order to make a decision.
Maribeth

I agree completely. There have been times I've posted a question or thought on this board, and as I was posting I realized I'd missed something important. Rather than embarrass myself, I'd do a little more checking and either find my answer or sharpen my question.

Of course, there have also been a number of times I posted something really stupid, didn't have sense enough to know it was stupid, and got slapped down (which I appreciated). The latter is probably the most important because I'd rather be abused on this forum than trying to explain to a client why I totally blew it and he now owes an extra $5K.

[Burke]

Will any of the inheritance be taxable to the beneficiaries? For example, a 401K or IRA that went to the estate, or whose beneficiary designation is being challenged? My recollection is that only legal fees relating to taxable income is deductible.

I think you have it bascially right. 212 allows hobby expenses up to taxable income from that hobby for instance. Investment expense on Sche A must be allocated between taxable/non-taxable investments. Attorney's fees in connection with attempts to obtain taxable income, to keep a job, in giving tax advice, to obtain lost wages (physical injury cases are an exception to taxable income) and some other situations up to gross includible income on the return. The general idea is that such expense must not exceed taxable income from that source. Thus, attorney's fees attributable to the obtaining of property are capitalized, so that when income is recognized at time of sale, they then become deductible by virtue of being added to basis. (The noticeable difference is that they are not subject to a 2% exclusion as they would be in the above cases reported on Sche A.)

[MrsUncleSam]

My recollection was that the fees were deductible if incurred for the "preservation of income". Master Tax guide references Reg. §1.212-1(k) and reads that legal expenses paid or incurred in recovering investment property and amounts of income includible in gross income are deductible. However, fees incurred in defending or perfecting title or in the acquisition or disposition of property are not deductible and must be capitalized.

Maribeth

I took a CPE course and you must have the attorney break the bill into

preservation of income plus other fees equal attorney bill