Legal Fees

[RLymanC]

Client is in a court battle with a state college. He is a tenured professor and is defending himself against retaliation of his department for various grievances and federal complaints he lodged.

Federal judge stripped the discrimination part of the suit.

It’s still in court and no decision or judgment has been awarded..

If he wins he will receive back pay and a large punitive award.

As I understand it, if the suit produces taxable income he can deduct the legal fees.

Correct??????

If yes, when are the fees deductible?

He paid $20,000 in 2005 and another $32,000 in 2006. Has not deducted any fees at this time.

[erchess]

My Understanding is

that he is attempting to protect his livelihood in a court battle with an employer or former employer. If that is correct then:

the legal fees would be deductible in the year accrued if he is an accrual basis taxpayer or the year paid if he is a cash basis taxpayer so you have to amend 2005;

and for both years the legal fees are miscellaneous itemized deductions subject to the 2% of AGI Limitation.

However check with TTB on whether legal fees are subject to the limitation. Of course, depending on his AGI and whether he has other itemized deductions, he might not be able to make use of this deduction.

[jainen]

personal problems

>>he is attempting to protect his livelihood<<

So what? I have drive to work to protect my livelihood, but it's not deductible. That's because it doesn't have anything to do with the actual job. And this lawsuit probably doesn't either.

Sure, he CLAIMS it's about whistle blowing. Before that, he claimed it was about discrimination until he got laughed out of court. Suppose the school says it's about how he takes advantage of his professorial role to hit on students. Male students--that would draw the discrimination defense. But would it be an ordinary and necessary part of the job? Gee, you think it would be for the convenience of the employer?

Besides, if he wins he's going to argue anew that it was really about discrimination or some other workplace regulation, and is all non-taxable anyway. Right? So where does he get off asking a tax subsidy to cover his personal problems?

[RLymanC]

Jainen

Disregarding all other arguements, if the wins and it produces taxable income (back pay/punitive damages) wouldn't that in itself allow legal fee deductions???

[jainen]

thing to do

>>Disregarding all other arguements<<

That would be a very un-jainen-like thing to do.

[BOB W]

Sounds..........

............. you need to wait for a final determination. If he wins, then amend previously file returns. I think you have to wait regardless of what he says..........

[George Boutwell]

He is a tenured professor and is >>defending<< himself against retaliation of his department for various grievances and federal complaints he lodged.

Don't you just love it when plaintiffs are able to turn themselves into defendants?

I like Jainen's approach. Since he's trying to structure the lawsuit so that the damages would be nontaxable, don't let him deduct the fees. Who knows what the final decision will be on appeal?

[jainen]

is non-taxable

>>Who knows what the final decision will be on appeal?<<

EVERYbody knows. There will never be an appeal. There will never even be a trial. The insurance company will give him $30,000 (with an equal amount for his lawyer) in settlement, admitting no guilt. Then they will send him a 1099-MISC which he will claim is non-taxable.

[erchess]

I inferred

from the OP that he was in a legal struggle over whether he can keep his job. We're talking about a direct consequence as opposed to a scenario where he is accused of murdering someone with whom his relationship does not involve his job but the consequence of losing would involve losing job because of being in prison. It would be the same if he were accused of any misconduct toward someone with whom he had a work related relationship. He can deduct the legal expenses as they are accrued or paid.

[George Boutwell]

My Inference

from the OP that he was in a legal struggle over whether he can keep his job.

Since the original post said he was seeking back pay, I inferred that he no longer worked there. Since his claim was based on employment discrimination, my inference was that the damages would be nontaxable (has the Jobs Creation Act of 2004 been hashed out here yet?).

[jainen]

ridiculous

>>Since his claim was based on employment discrimination<<

But the court ruled the discrimination issue was without merit. Can he make income be non-taxable simply by SAYING so? No.

We don't know why they fired him. He was tenured so it must have been something pretty egregious. He doesn't get to deduct expenses of personal misconduct just because it occurs on the job. That would be ridiculous.

[RLymanC]

Not fired

He was re-instated by court order and given tenure,,,,,back pay issue not settled yet.

The question: When can the legal fees be deducted.

On the phone with IRS for 2:20, went thru 7 transferes,,,,no answer.

Can cash basis taxpayer deduct in the year paid?

What if legal fees are paid 5 years before settlement, 040X goes back 3 years. Does the taxpayer loose the ability to deduct allowable legal fees??

If he looses the suit, he could use 1040X to pay back taxes.

[George Boutwell]

If he wins he will receive back pay

But he's still employed? I suppose it could happen, if his complaint is that he wasn't promoted, or wasn't paid as much as others.