michaelmars Posted March 29, 2012 Report Share Posted March 29, 2012 taxpayer and his company were being sued. he paid one of the plaintiffs that was suing him personally he paid $$ from is company and $$ personally to settle with this plaintiff. Still 2 more plaintiffs are part of the suit. the suit was for a professional job he did on behalf of his company. [the company is a c corp and the taxpayer is an employee of it and owns 50%.] Is this deductible anywhere on his 1040? Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 30, 2012 Report Share Posted March 30, 2012 Is the company going to reimburse him for what he paid personally? You could deduct the amount on the A, since it was paid to protect his job and earnings, but it would be better if the company reimbursed him instead. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 30, 2012 Author Report Share Posted March 30, 2012 as i said, he is basically the company and since the company has about 2 mil of legal costs so far and a huge nol, he wanted to take the deduction personally if he could. Whether its the company or himself its the same money. He has been loaning money to the corp to pay its legal bills so this time he just decided to pay it directly. Quote Link to comment Share on other sites More sharing options...
B. Jani Posted March 30, 2012 Report Share Posted March 30, 2012 What about EO Insurance or Business insurance? Quote Link to comment Share on other sites More sharing options...
DANRVAN Posted March 30, 2012 Report Share Posted March 30, 2012 He and the corporation are two separate entities. He cannot deduct the expenses that belong to the company. The case of Lambert clarifies “Citing the long established rule that a taxpayer can't deduct expenses incurred on behalf of someone else's business, the district court ruled that Lambert's unreimbursed expenses were the corporation's expenses, not his.” You might take a look at “Graves” in the 9th Circuit Court. He was allowed to write off worthless loans to his corporation on Schedule A. Good luck, Dan Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 31, 2012 Author Report Share Posted March 31, 2012 he was sued personally and the company was sued in one lawsuit. the company was named as was he as president and as the person who did the appraisal. 3 partys to the suit and one agreed to leave for $500,000, he had the company pay 400 and he paid 100; the plaintif didn't care where he got the money from and both the company and he received releases. Quote Link to comment Share on other sites More sharing options...
jainen Posted March 31, 2012 Report Share Posted March 31, 2012 >>the suit was for a professional job he did on behalf of his company<< That describes the context but not the issues of the suit. Did he accidentally injure somebody or damage property in the ordinary course of business? Or was there some malfeasance such as fraud or misrepresentation? Perhaps it was a civil rights violation like age discrimination or sexual harrassment. You say "the appraisal" so I would guess the allegation is that he did not exercise ordinary business care and prudence, and the corporation did not adequately supervise its employee. Of course, I'm sure he denies the allegation, and claims he only paid off the one plaintiff to avoid higher legal fees. To the extent that protected the corporation, it's probably an investment expense. To the extent it protected him personally, it is probably a personal expense. To the extent he was tax motivated to shift the deduction onto his 1040 because the corporation already has a huge NOL (which is the reason given in this thread), it isn't deductible at all. I don't think you can characterize this with any confidence until you have read the court and settlement documents and discussed it with the insurance adjuster. Put this one on extension. By the way, this is a good example of how using a corporation doesn't offer much liability protection for professional services. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 31, 2012 Author Report Share Posted March 31, 2012 I agree with the last line re: corp protection and if he had insurance this wouldn't be an issue. He did a jewelry appraisal on investment items. the appraisal was for the seller. Most of the peices that were sold in the following 3 years sold for more than his appraisal then the economy tanked. 3 parties that weren't even disclosed to him jointly purchased some of the items and are suing over value. [3 years later] This is part of a much larger suit and over the last 2 years many parts were thrown out by the court. But my client is getting killed in legal fees so he took the offer from one of the parties to end that part of the case for x dollars. Since his company and he were both sued, he paid part of the settlement from corp and part from personal funds. Quote Link to comment Share on other sites More sharing options...
jainen Posted March 31, 2012 Report Share Posted March 31, 2012 >>He did a jewelry appraisal on investment items.<< What a horrible development! But he was stupid. Insurance would have paid all his legal defense, and the settlement too. He should know that any professional is vulnerable to this kind of extortion, a nuisance lawsuit that's cheaper to lose than to win. Well, that was his own business decision and his own business outcome. He can't expect the tax system to bail him out. If he doesn't have investment income this year or in the future to offset this as investment expense, the best he can do is put it on Form 2106 and see if he can salvage some through an N.O.L. calculation. It might attract IRS attention, with unpredictable results. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 31, 2012 Author Report Share Posted March 31, 2012 >>> he doesn't have investment income this year or in the future to offset this as investment expense, the best he can do is put it on Form 2106<<< this was the original point of my post, i did put it on a 2106 but was wondering if there was another way or a more correct way. How would i report it as investment expense, on sch a or 4797? His investment expense is enough to absorb this but i didn't know if or how to report it as investment exp. Quote Link to comment Share on other sites More sharing options...
jainen Posted March 31, 2012 Report Share Posted March 31, 2012 >>how to report it as investment exp<< I changed my mind. The corporation is not an investment in any logical terms. Anyway it would still be on Schedule A. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 31, 2012 Author Report Share Posted March 31, 2012 sure, you change your mind and my client owes money....<s>. ok so it stays on 2106 as i originally did it. thanks for all your thoughts. Quote Link to comment Share on other sites More sharing options...
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