Masonry Magazine October 1971 Page. 19
DAMAGE FROM ACCIDENT
The Tax Court ruled that the measure of damages was $800, or the $1200 less $400. Hence, the taxpayer was allowed a casualty loss (after the $100 floor) of $700. Wickline v. Commissioner, T. C. Memo 1971-205.
LEGAL EXPENSES
Like any other business expense, legal expenses incurred may be deducted so long as they are incurred in connection with a business transaction and are incurred primarily for the purpose of preserving existing business reputations and good will. However, this business connection must be there at the origin of the legal expenses. In other words, legal expenses will not be deductible if the consequence of their being incurred is to benefit a person's business.
This distinction was made clear in a case involving a woman whose sole source of income was in the form of interest and dividends from her security holdings of about $2 million. It seems that the taxpayer, a Mrs. Brooks, was attacked by a burglar in her home. The suspect, whom Mrs. Brooks identified from a police line-up, was subsequently tried and acquitted. Then, the suspect brought suit against Mrs. Brooks for malicious prosecution seeking damages in the amount of $2 million.
Fortunately, for Mrs. Brooks, the suit against her was dismissed by the court. However, in defending this suit, Mrs. Brooks spent approximately $45,000 for legal expenses. Mrs. Brooks sought to deduct these legal expenses as business expenses on the ground that had she not undertaken the cost of her defense, much of her income-producing property would have been dissipated. Also, Mrs. Brooks pointed out that very likely had it not been for her wealth, the civil action would not have been brought against her.
The Tax Court in ruling against the deductibility of these expenses found that these legal expenses were nondeductible personal expenditures. While it was true, the court noted, that the successful defense of the malicious prosecution suit did in fact protect her investments, she could not show that these expenses had their origin in the management, conservation or maintenance of income-producing property. Whether such expenses can be regarded as business expenses does not depend on the consequences that might result to a person's income-producing property. Brooks v. Commissioner, Т.С. 1971-152
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