Deductibility of Legal and Other Professional Fees (Portfolio 523)

Description

Tax Management Portfolio, No. 523, Deductibility of Legal and Other Professional Fees, provides a detailed discussion of the circumstances under which a taxpayer may deduct legal and other professional fees.

Legal and other professional fees are not specifically mentioned in the Code as deductible items. Therefore, a taxpayer is able to deduct these types of fees only if they qualify as “ordinary and necessary” expenses under §162 (business expenses) or §212 (expenses related to the production of income). Expenses that do not qualify as deductible under either §162 or §212 are either nondeductible personal expenses or capitalized expenditures.

There are several requirements that must be met in order for a taxpayer to deduct legal or other professional fees as trade or business expenses or as expenses related to the production of income. Each of these requirements is discussed in detail in Section I of this Portfolio. The determination as to whether these types of fees are deductible is based on an analysis of all of the relevant facts and circumstances. In the context of expenses related to legal proceedings, the “origin of the claim” test is used to determine whether a particular expense is deductible. This test is discussed in detail in I, D, 3.

Section II of this Portfolio provides a discussion of how legal and other professional fees are allocated when only a portion of those fees are deductible. Section III of this Portfolio provides a discussion of the deductibility of specific types of legal and other professional fees including accounting fees, fees for investment and management, and fees related to corporations and other entities.

Table of Contents

I. Legal and Accounting Fees – General Requirements for Deducting
II. Legal and Other Professional Fees
III. Allocation: Partially Deductible and Partially Nondeductible Legal and Other Professional Fees
IV. Related Sections
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)
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)



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