Attorney-at-Law

ORIGINS

In Uncategorized on 07/13/2017 at 17:32

Though this blogpost is about one who dealt with pharmaceuticals and not cosmetics, they’re close enough for a quick headline. And the point of this little tale (“Is there one, now?” as my readers may remark) is that, when it comes to deductibility of legal fees as business expenses, it’s the origin of the claim and not the outcome (real or potential) that counts.

Here’s CSTJ Panuthos to tell us about Arthur Dulik, Jr. and Ellen B. Kugler Dulik, 2017 T. C. Sum. Op. 51, filed 7/13/17, but it’s Art’s story.

Art was a high-level type at a Moderately Big Pharma (MBP). As a new employee in the last millennium, he signed a secrecy and a non-compete. Fast forward thirty-five years, and Art wants out. MBP gives him a Confidential Separation Agreement and Release to sign, whereat Art calls in a couple law firms (hi, Judge Holmes) to renegotiate the deal.

MBP tells him to take it or leave it. Art does, having paid $26K to the law firms. A month after clearing the jump door, Art cranks up a Sub S wherewith to do consulting in the pharma field. He claims he has fears of legal issues arising out of his consulting.

Like maybe perchance he might violate the noncompete? Or lay a prohibited blast on his former employer?

Howbeit, CSTJ Panuthos is succint. “Mr. Dulik’s claim arose from his status as a former employee of MBP, not from his consulting business.  He hired attorneys because he was trying to negotiate the terms of the severance agreement proffered in connection with the termination of his employment at MBP.  See Gilmore, 372 U.S. at 49; Kenton v. Commissioner, 2006 WL 237112, at *2-*3; Test v. Commissioner, 2000 WL 1738858, at *4.  We conclude that petitioners are not permitted to deduct the legal fees as ordinary and necessary business expenses of Mr. Dulik’s consulting business as a flowthrough from [his Sub S].  However, petitioners are entitled to $26,3256 as a miscellaneous itemized deduction on Schedule A, subject to the limitations set forth supra.  See secs. 56(b)(1)(A)(i), 67(a) and (b), 68, 211, 212(1).” 2017 T. C. Sum. Op. 51, at pp. 12-13.

The limitations are the famous 2% AGI limitation, Sched A phaseouts, AMIT, production-of-income rather than trade-or-business, and all that jazz.

And even though Art was a CPA and CFO, he got his numbers wrong. Art’s legal; fees as claimed were $26,781. “Petitioners provided substantiation for legal fees totaling $26,325, and did not provide an explanation for the discrepancy of $456 ($26,781 – $26,325 = $456).” 2017 T. C. Sum. Op. 51, at p. 13, footnote 6.

Art avoids the add-ons, except for $1700 in dividends he forgot to put on the return.

He kept good records, and testified credibly that he was concerned about running his own business. Anyway, origin-of-claim for deductibility is tough stuff. “The origin of the claim doctrine, regarding treatment of this particular type of expense for legal fees, is a technical area of law, is fact intensive, and required a reference to and analysis of caselaw as more fully discussed in this opinion.” 2017 T. C. Sum. Op. 51, at p. 16.

 

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