Deductability of Legal Fees to Fight Utility Company

[Hamacher]

I have a client that is incurring some legal fees to fight a utility company from installing high speed electical lines over his building. He has one company that owns the building and an operating company that occupies the space. Is there any reason he would not be able to deduct the fees and where should the fees be deducted?

Thanks in advance for the help.

[appelman]

Why not as legal fees?

Assuming there is a legitimate business purpose to his fight.

[Gary2]

Would this be considered defending title in a way that requires it to be added to the basis of the property?

[Davc]

Why not?

Because it relates to title and should be capitalized as part of the land.

[appelman]

I think I'm convinced.

At least it sounds reasonable.

[erchess]

I hope I'm not being overly picky here

but even if you capitalize the expenses the taxpayer has to be prepared to explain to a potentially skeptical auditor why the lines threatened the taxpayer's business. I guess I am just skeptical and as an auditor would argue with the taxpayer over this issue. As far as tax law goes I claim that it is not enough for the taxpayer to be sincerely of the opinion that the lines threaten his interest. I think he might have to convince a court by the preponderance of the evidence that his belief was factually correct.

[taxxcpa]

If he loses the case, then it would be a lot less likely that he could use the expense than if he won.
Winning would imply that he did have a legitimate business reason to incur the legal expense.

[kpangelinan]

but even if you capitalize the expenses the taxpayer has to be prepared to explain to a potentially skeptical auditor why the lines threatened the taxpayer's business. I guess I am just skeptical and as an auditor would argue with the taxpayer over this issue. As far as tax law goes I claim that it is not enough for the taxpayer to be sincerely of the opinion that the lines threaten his interest. I think he might have to convince a court by the preponderance of the evidence that his belief was factually correct.

As aggressive as I am to defending client deductions and looking for reasonableness of such, I think I'd have to agree with this post.

[Gary2]

but even if you capitalize the expenses the taxpayer has to be prepared to explain to a potentially skeptical auditor why the lines threatened the taxpayer's business. I guess I am just skeptical and as an auditor would argue with the taxpayer over this issue. As far as tax law goes I claim that it is not enough for the taxpayer to be sincerely of the opinion that the lines threaten his interest. I think he might have to convince a court by the preponderance of the evidence that his belief was factually correct.

I think there's a valid point here, but it's more subtle than that.

Title expenses are related to the real estate, and only indirectly to any business operated thereon. Hence title insurance is included in the basis of a personal residence (TTB 6-18), even though it's strictly personal use.

Nor is there a requirement that you actually win the suit. It might be settled out of court, or maybe the landowner introduces legitimate new evidence about the health risks of high power lines, and the court decides it's valid case but not enough to outweigh existing evidence against such risks. It's still a bona fide defense of title.

The type of expense that I'd question would be if it clearly lacked legal merit and was done for other reasons. For example, someone might fight an eminent domain taking because they oppose the underlying project on political grounds.

[Kram BergGold]

What I would do

I would have the entity that owns the real estate pay the legal fees and capitalize the cost.
The reason for this expense is to protect the value of the property.

If there was a valid reason for the business entity to pay the bill, then the business could capitalize the cost.

[Roberts]

I would have the entity that owns the real estate pay the legal fees and capitalize the cost.
The reason for this expense is to protect the value of the property.

If there was a valid reason for the business entity to pay the bill, then the business could capitalize the cost.

ME TOO. The value of the property is what I'd argue about if possible and reasonable. It doesn't necessarily impact the operations of the business, it does impact the resale value of the property in most cases.

[erchess]

Good Point

I was completely overlooking impact on resale value. Of course it's reasonable for a business to protect property it owns from anything that would tend to reduce the resale value of said property. However, with that conceded, I would like to ask for evidence for the proposition that power lines over a building tend to reduce its sale value. At the risk of being like an old man who always has a story to tell I am going to tell one here.

I live in a house located halfway up one of the taller mountains in the Blue Ridge and thus my front porch overlooks a largely undeveloped valley that is quite beautiful. Aside from a gravel road, a few houses and power lines, the view is much the same as it must have been when settlers first came to the valley. My grandfather bought the house and land in about 1933 when there was no electricity in the vicinity and the only telephone service in the vicinity was at a boy's camp down the road far enough that its associated lines were not visible from our property. I grew up hearing how upset my Grandfather was at the fact the power and phone companies ran wires across his view just because he signed documents saying they could and despite oral agreements he thought he was making that they would be run behind the house. (I did not find out until after he died that the power company wrote him that running the lines while on his property behind the house would cost x amount of dollars more than the straight line route and offering to run the lines as he wanted if he would reimburse the extra cost.) I loved my Grandpa and overall viewed and view him as a wise man but even as a child I thought he was off his rocker on this subject. I just don't see power lines as a problem and I have a negative visceral reaction to anyone who claims they are a problem. I have never lived in a house from which there were not lines visible from some or all windows and porches.

[Gary2]

We don't have enough information to know the basis of the suit. While resale value seems to satisfy understanding, it's not the only issue. For example, as far as I know, in Massachusetts a taking of a temporary easement requires compensation, even though there's no long term change to property values. For example, sometimes it's necessary to use private land for a temporary bridge while rebuilding the original bridge on public property. The landowner will be compensated for the impact of the temporary bridge, even though the net result is likely to be an improvement to property values once the new bridge is complete and the land restored.

In this case, it's conceivable that the construction will impact the business, just because of traffic, construction equipment, etc. Indeed, if the land owner gets any compensation attributable to the loss of business income, I wonder if that proportion of the legal fees would be considered currently deductible; presumably that portion of the compensation would be treated as business income and not capital income.

But we still don't know. Is this fight against a taking? Or does the power company already have an easement, and it's a claim that the new power lines aren't included?

[Snaggletooth]

Deduct It

Showing my ignorance again, or maybe simplicity. I think it is pretty straightforward, and some of you are trying to make it more complicated than it is.

Capitalize because it is Title? How? How is the ownership itself affected by the installation of power lines?

Operation and devaluation are at the heart of the problem. If there was no potential damage why on earth would the owner even bother to spend the money??

It has been said we can be sued for being ugly. Frivolous or not, I agree with the deductibility should not be tied to the outcome of the lawsuit. I think if we start dropping deductions because of lost court cases, we are introducing a horrible precedent.