That’s Judge Paris’ advice to Naren Chaganti, a/k/a Narendra Chaganti, in 2013 T. C. Memo. 285, filed 12/17/13.

Naren is a lawyer, apparently a solo, and therefore a cash basis taxpayer. He has a problem with reporting business expenses when paid, as he would rather offset them against client reimbursement, which sometimes happened years later.

Judge Paris: “The law is clear that, for a cash basis taxpayer, the deduction generally must be taken in the year the expense is actually paid by the taxpayer. See Reynolds v. Commissioner, T.C. Memo. 2000-20. Petitioner has failed to point out any exception in the Code that would exclude him from the general rule.” 2013 T. C. memo. 285, at p. 8.

Of course, “It should be noted that this determination reflects the Court’s findings with respect to the timing of the deductions only and not the veracity of the expenses themselves.” 2013 T. C. Memo. 285, at p. 8, footnote 6.

Naren a/k/a Narendra has other problems. He got fined $262 for counseling a client to skip a deposition because some “unforeseen circumstances” made him feel it was to his client’s best interests not to show; however,  Naren a/k/a Narendra has no evidence to support this assertion. Nevertheless, he wanted a Section 162 ordinary-and-necessary deduction, which IRS wasn’t giving him.

But because the record is incomplete, Naren a/k/as Narendra gets a bye: “…it is unknown at this time under which statute petitioner was ordered to pay the $262 sanction to opposing counsel. It is similarly unknown what criteria were required to impose this sanction and whether such an imposition in and of itself would indicate that the expense was not ordinary or necessary to the practice of law. Taken in a light most favorable to each nonmoving party in these cross-motions for summary judgment, a genuine dispute of material fact exists. Accordingly, neither petitioner nor respondent [IRS] is entitled to summary judgment at this time with regard to the deductibility of the $262 sanction.” 2013 T. C. Memo. 285, at p. 11.

However, the $262 isn’t the last of Naren a/k/a Narendra’s  problems. He also got hit with a $2300 penalty ($100 per day for nonpayment) payable to the US District Court because he didn’t pay the $262 when ordered. That deduction is a dead duck.

“Section 162(f), however, disallows a deduction for fines or penalties paid to a government or a governmental agency for the violation of any law. Disallowance under section 162(f) is not limited to criminal fines and penalties. It is clear that the $2,300 fine imposed on petitioner for failure to pay that sanction was for the violation of his duties as an officer of the court in being held in contempt and failing to timely pay the $262 sanction. This amount was paid to the Clerk of the Court for the District Court, a governmental agency responsible for collecting such fines and penalties. Accordingly, petitioner is not entitled to deduct the $2,300 sanction as an ordinary and necessary business expense….” 2013 T.C. memo. 285, at pp. 9-10. (Citation omitted).

Naren a/k/a Narendra’s bad day isn’t over yet. He got slapped with a $18,125 payment to opposing counsel because Naren a/k/a Narendra willfully and unreasonably protracted the litigation, in violation of 28 USC § 1927.

And, unlike the $262 fine, “(T)he District Court then engaged in a lengthy itemized analysis to separate the amount of opposing counsel attorney’s fees that could be directly attributed to petitioner’s improper conduct from those which would be reasonably typical to the practice of law.” 2013 T. C. Memo. 285, at p. 12.

Just in case Naren a/k/a Narendra (and anybody else) didn’t get the message, Judge Paris spells it out again. “The Court finds that the mere fact that petitioner was ordered to pay opposing counsel attorney’s fees under 28 U.S.C. sec. 1927, demonstrates that those amounts were not ordinary and necessary to the practice of law. The District Court’s further analysis in removing the amounts attributable to typical legal expenses confirms that the remaining $18,125 that petitioner was ordered to pay was not common to the practice of law, nor was it appropriate or helpful to his business. Accordingly, petitioner is not entitled to deduct the $18,125 fine levied against him under 28 U.S.C. sec. 1927, as an ordinary and necessary business expense….” 2013 T. C. Memo. 285, at pp. 12-13.

No tax break if you don’t play nice.