legal fees

[Possi]

There will be no easy returns for me from now on, I'm convinced.

My client bought and sold a (flip) house in 2006. They had a gain on the sale, all on Sch D.

In 2007 they were sued for some of that very gain. Seems they had a partner starting out in the gig, who bailed out early. He sued my clients.

Clients legal fees $3000
Clients lost and had to pay $8500

Now, these clients do not make a lot of money. With W2, Sch C, and losing tons on Sch E rental properties, they have no taxable (ordinary) income. (Self employment tax only)

While I do not know what if anything to do with these expenses, I played with the program to see what would happen with Sch D loss and it does not change the bottom line. I do not think amending 06 should happen since the expenses were in 07, but just in case, I ran it and there is no change to the tax liability. (Taxes paid were all SE tax.)


So, here's my question....

Where if anywhere, can I use these expenses? I don't want to miss a NOL if there might be one to carry forward.

geez,

thanks,
~possi

[Koss]

Legal Fees

You may be able to deduct the legal fees on Schedule A, as fees paid in connection with an income-producing activity.

That may help generate a Net Operating Loss.

For the payment to the party that sued, you may want to revisit the idea of amending the 2006 return. If you amend the 2006 return to reflect gross proceeds on the sale of the property of $8500 less, does this generate a capital loss that can be carried forward to 2007?

If it does, it may carry forward from 2007 to 2008. You noted that they have zero taxable income for 2007. So a capital loss carryforward will not benefit them on the 2007 return. This means that the entire loss might carry forward to 2008. This question came up in an earlier thread. The determining factor is not whether they have taxable income, but rather what value appears on line 41...

[Possi]

thanks Burton

I didn't want to do the aerobics if there was no means to it. Now I see that it might do some good. I will need to refresh myself on NOL carryforwards....
ugh.

I didn't know I could amend the 06 since the payoff was in 07. Now that I can, the losses carried over will help them next year, since hubby decided to get a j-o-b.

And this is why I don't use my real name! I couldn't talk about my clients!

Today's client has installment tobacco sales that this forum helped me with last year. Thank goodness I print all my answers!

=)

~possi