Deductibility of Legal and Accounting Fees, Bribes and Illegal Payments, written by Christopher G. Stoneman, Esq., covers legal and accounting fees and discusses fines, penalties, bribes, and kickbacks.
Legal and accounting fees are not specifically mentioned in the Code as deductible items. Therefore, their deductibility turns on whether they qualify as “ordinary and necessary” expenses under §162 (business expenses) or §212 (investment or tax-related expenses).
This Portfolio explores in detail the meaning of “ordinary and necessary” in the context of the deductibility of legal and accounting fees, and it considers the extent to which such expenses must be capitalized, deducted as a loss, or given some treatment other than as a current expense.
This Portfolio also discusses in detail the requirements of §162(c) and (f) and analyzes the extent to which they apply to particular types of payments and penalties.
Deductibility of Legal and Accounting Fees, Bribes and Illegal Payments allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Legal and Accounting Fees - General Requirements for Deducting
A. Introduction
B. Trade or Business Legal and Professional Fees
1. Fees Must Be Incurred in Carrying on a Trade or Business
2. Fees Must Be Ordinary and Necessary
3. Fees Must Be Reasonable in Amount
4. Fees Must Be Paid or Incurred During Taxable Year
5. Fees Must Be Paid by Person to Whom Services Are Rendered
C. Deductible Non–Business Legal and Other Professional Expenses
1. Introduction
2. Fees Paid or Incurred in Connection with the Production or Collection of Income
a. Production or Collection
b. Distinction Between Disposition of Property and Collection of Income
c. Distinctions Between Acquisition, Perfection of an Undefined Income Interest, and Collection of Income
d. Expenses Incurred In Involuntary Dispositions
e. Treatment of Expenses Where Sale Not Consummated
3. Fees Paid in Connection with the Management, Conservation, or Maintenance of Property for the Production of Income
4. Fees Paid in Connection with the Determination, Collection, or Refund of Any Tax
D. Legal and Other Professional Fees Constituting Personal Expenses or Capital Expenditures
1. Personal Expenses
2. Capital Expenditures
3. Origin of the Claim Test
a. Origin of the Claim Test as Applied in the Context of Nondeductible Personal Expenses
b. Origin of the Claim Test as Applied in the Context of Nondeductible Capital Expenditures
(1) Perfecting and Defending Title to Property
(2) Acquisition and Disposition of Property
E. Allocation of Legal and Other Professional Fees Which Are Partly Personal Expenses or Capital Expenditures
II. Legal and Other Professional Fees
A. Categories of Fees
1. Legal Fees and Related Expenses
a. Court Costs
b. Legal Fees Related to Settlements
2. Accounting Fees
3. Professional Fees for Investment and Management
a. Fees for Investment Advice
b. Management Fees
B. Employment Agreements
C. Fees Related to Activities of Corporations and Other Entities
1. In-House Counsel and Accountants
2. Corporate Reorganization Expenses
a. Expenses of Corporations in Acquisitive Reorganizations
(1) Expenses of the Acquiring Corporation
(a) Taxable Acquisitions
(i) Amounts Paid to Facilitate
(ii) Exceptions
(iii) Treatment of Amounts Required to be Capitalized
(b) Tax-Free Reorganizations
(2) Expenses of the Acquired Corporation
b. Expenses of Corporations in Divisive Reorganizations
(1) The General Requirement of Capitalization
(2) Exceptions to the Capitalization Requirement
c. Expenses of Corporations in a Type E Recapitalization or Type F Reorganization
d. Expenses of Corporations in Bankruptcy Reorganizations
3. Insurgent Shareholders and Corporate Takeovers
a. Proxy Fights
(1) In General
(2) Proxy-Related Expenses in Transactions Facilitating Acquisitions and Changes in Capital Structure
b. Takeover Attempts
(1) Case Law and IRS Guidance Prior to the 2004 Regulations
(2) The 2004 Regulations
(a) Costs Incurred in Defensive Measures
(b) Mutually Exclusive Costs and Break-up Fees
4. Liquidations
a. Complete Liquidations
(1) Complete Liquidations Prior to the Promulgation of the 2004 Capitalization Regulations
(2) The 2004 Capitalization Regulations
b. Partial Liquidations
(1) Partial Liquidations Prior to the Promulgation of the 2004 Capitalization Regulations
5. Redemptions
6. Actions Involving Corporations and Shareholders
7. Stock Issuance Expenses
8. Expenses of Stock Appraisal Proceedings
a. Case Law and Guidance Prior to the Promulgation of the 2004 Capitalization Regulations
b. The 2004 Capitalization Regulations
9. Miscellaneous Corporate Transaction Expenses
a. Costs of Asset Sales
b. Integration Costs
c. Success-Based Fees
d. Borrowing Costs
e. Standstill Agreements
D. Antitrust Violations
E. Contract Claims
F. Tort Claims
G. Criminal Charges
1. In General
2. Professional License Suspension or Revocation
H. Divorce Proceedings
1. Alimony and Child Support
2. Property Rights and Settlements
3. Prenuptial and Postnuptial Agreements
I. Transactions Relating to Trusts and Estates
1. Trusts
2. Estates
3. Effect of Section 67
J. Collection of Income
K. Determination of Tax
1. Preparation of Income Tax Return
2. Claim for Refund
3. Civil Fraud
4. Criminal Tax
L. Perfection or Defense of Title
1. Legal and Other Professional Fees Related to the Perfection or Defense of Title
2. Acquisition and Disposition of Property
a. Stock and Other Ownership Interests
b. Real Property
M. Revocation of Operating License
N. Environmental Clean-up Costs
O. Reporting Payments Made to Attorneys
III. Allocation: Partially Deductible and Partially Nondeductible Legal and Other Professional Fees
IV. Related Sections
A. Section 165
B. Section 195
C. Section 248
D. Section 709
E. Section 263A
F. Section 170
G. Section 174
H. Section 263(a)
I. Section 162(e)
J. Section 198
V. Fines, Penalties, Bribes and Kickbacks: General
VI. Deductibility of Illegal Bribes or Kickbacks to Government Officials or Employees Under Section 162(c)(1)
VII. Bribes and Kickbacks to Persons Other Than Government Employees or Officials Under Section 162(c)(2)
Introductory Material
A. The Requirement that State Statute Be “Generally Enforced”
B. Burden of Proof Under Section 162(c)(2)
C. Violation of Federal Law Under Section 162(c)(2)
VIII. Deductibility of Kickbacks, Rebates, or Bribes Under the Medicare or Medicaid System - Section 162(c)(3)
IX. Deductibility of Fines or Penalties Under Section 162(f)
X. Inclusiveness of Public Policy Doctrine in Section 162(c), (f) and (g)
Working Papers
Table of Worksheets
Worksheet 1 Sample 195 Elections to Amortize Start-Up Expenditures.
Worksheet 2 Sample 248 Election to Amortize Organizational Expenditures
Worksheet 3 Senate Report to 1969 Tax Reform Act (H.R. 13270), S. Rep. No. 552, 91st Cong., 1st Sess. p. 274 (1969), 1969–3 C.B. 596
Worksheet 4 Aerospace Industry Coordinated Issue Paper Deductibility of Illegal Bribes, Kickbacks and Other Payments
Worksheet 5 GCM 34848 - Deductibility of Fees for Tax Advice Incident to Divorce
Worksheet 6 GCM 34915 - Deductibility of Legal Expenses for Suit to Recover Under Fidelity Insurance Policies.
Worksheet 7 GCM 38490 - Deductibility of Legal Fees Incurred in Defending Against Patent Infringement.
Worksheet 8 GCM 39465 - Deductibility of Legal Fees Incurred by Corporation in Defending Its Employees Against Civil and Criminal Charges.
Bibliography
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Treasury Rulings:
Cases:
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