S-corp - Lawsuit Settlement - Tax Deductible?

[Hoosier]

Got a S-corporation client, $5,000,000 annual sales. One of his employees had an auto accident driving a company vehicle on company time that resulted in serious bodily injuries to another party. Client (S-corp) has been sued. Insurance policy covers $3,000,000 but plaintiff wants to go to court for more, however, willing to settle for $250K.

In general terms, if my client settled the matter for $250,000, would this settlement payment be considered a tax deductible business expense to the corporation? If yes, where would you report on the 1120S?

[Rapid Robert]

Maybe NYEA has a better citation, but from some prelim searching I did through PLRs and CCAs, the expense should be currently deductible if it arose during the normal course of business and is not related to a capital transaction. Probably a good idea to use Form 8275 to disclose the position, given the dollar amount.

[New York Enrolled Agent]

Insurance policy covers $3,000,000 but plaintiff wants to go to court for more, however, willing to settle for $250K.

I'm having trouble following this. Insurance for 3 million - settlement for $250K. Are you saying the plaintiff is going to get $3,250,000?

[Hoosier]

Yes, insurance company paying $3,000,000 per policy limits and plaintiff seeks another $250,000 to settle.

Yes, Rapid Robert - the accident occurred during the normal course of business.

[New York Enrolled Agent]

Yes, insurance company paying $3,000,000 per policy limits and plaintiff seeks another $250,000 to settle.

Yes, Rapid Robert - the accident occurred during the normal course of business.

Then as RR noted, it should be deductible.

Gilmore 372 US 39 contains The principle we derive from these cases is that the characterization, as "business" or "personal," of the litigation costs of resisting a claim depends on whether or not the claim arises in connection with the taxpayer's profit-seeking activities.