lawyer fees to defend oneself

[JenMO]

Man was accused of sexual misconduct. He hired a lawyer and soon the charges were dropped, because the victim said she had made all of it up. He is self employed, and even though the accusations were false, there was a lot of publicity, and he has lost business on account of this. Could the lawyer fees be deducted anywhere? What proof would you need to back up your deductions?

[Bees Knees]

TTB, page 4-26 says:

Legal Expenses
Legal fees related to producing or collecting taxable income or
getting tax advice is deductible. Deductible legal expenses also
include:
• The cost of either doing or keeping a job, such as expenses paid
to defend against criminal charges arising from the taxpayer’s
job.
• The cost of tax advice related to a divorce if the bill specifies how
much is for tax advice and it is determined in a reasonable way.
• The cost of collecting taxable alimony.
Nondeductible legal expenses. Legal expenses
related to the following are not deductible:
• Custody of children.
• Breach of promise to marry suit.
• Civil or criminal charges resulting from a
personal relationship.
• Damages for personal injury.
• Preparation of a title, or defense or
perfection of a title.
• Preparation of a will.
• Property claims or property settlement in a divorce.

Ask yourself this:

Were the legal fees related to "the cost of either doing or keeping a job, such as expenses paid to defend against criminal charges arising from the taxpayer’s
job," ?

Or were the legal fees related to "Civil or criminal charges resulting from a
personal relationship"?

I suspect they were paid primarily to defend himself against the charge of criminal sexual misconduct, not to keep his job. Keeping his job was a side less important issue than staying out of jail.

[erchess]

However, if the relationship

with the alleged victim had been a business relationship then Bees would the legal expenses be deductible?

[taxxcpa]

Maybe

Although his business would have been adversely affected, I doubt if the deduction would be allowed, but it could certainly be argued that it SHOULD be allowed since he was innocent.

A long time ago, I read that a military officer was allowed to deduct the cost of defending himself in a court marshall in which he was found not guilty. If he had been guilty, it would probably have been disallowed.

[erchess]

For the record

a military trial is known as a Court Martial. The second word means "military" and is pronounced as you spelled it.

[taxmandan]

A long time ago, I read that a military officer was allowed to deduct the cost of defending himself in a court marshall in which he was found not guilty. If he had been guilty, it would probably have been disallowed.

But this guy was not found 'not guilty', the accuser just dropped the case. I don't see it as deductable anywhere, it's a personal legal cost regardless of the negative impact of the publicity to his business. Now if she had sued the business entity also, the legal fees to defend the business would be deductible, IMO.

[KJ Judd]

If you deduct it, do you need to file Form 8275 (disclosure stmt)? Or are you more likely than not to prevail on the facts?

[Koss]

Agree

But this guy was not found 'not guilty', the accuser just dropped the case. I don't see it as deductable anywhere, it's a personal legal cost regardless of the negative impact of the publicity to his business. Now if she had sued the business entity also, the legal fees to defend the business would be deductible, IMO.

Personal legal expenses are not deductible, and it's sounds like this was a personal legal expense.

Presumably, he would have had to hire a lawyer to defend himself against the criminal charges even if there had been no financial impact to his business as a result of the false accusations. For example, he probably would have had the same expenses even if he had been unemployed the whole time. The cost of the defense does not seem related to his business activities.

With that being said...

He can sue the accuser for defamation. Those legal expenses are deductible if he has concrete evidence of the financial impact to his business.

One other observation:

The client probably will never fully grasp this. Although he can't deduct the legal fees, the revenue he lost as a result of the false allegations is, in some sense, already a deduction. He is not reporting the income that he lost. So he's not paying tax on it.

Even tax pros may not see it this way. But stop and think about it...

Haven't you ever had a client ask you if they could take a tax deduction for "lost rent" for those months that their rental unit was vacant?

You can't deduct missing income. It isn't there to begin with. It's already been removed from your AGI.

Burton M. Koss
koss@usakoss.net

[S T]

Burton you are right

Clients don't seem to understand loss of revenue if they are on a cash basis.

Cash basis tax payers are always asking to deduct their bad debts that have never been included in their income on the tax reporting.

Sandy