No, you can`t. Only certain types of legal fees are tax deductible and, in your case, legal fees are capital and therefore not deductible. My family trust has brought some shares in a private company, and this business is barely launched. And I paid a lawyer`s fee for developing shareholder contracts with my own money. And then I transferred shares belonging to my family trustee to another member of the private company. My question is, can I claim these legal fees on my personal tax return? While not covered in this case, legal and accounting expenses resulting from a sale of shares by the owner or manager will also be taxable benefits when paid by the company, but transactions involving the sale of shares will also result in significant social work in the transaction. In the case of a fair distribution of these royalties between the company and the shareholder, the amounts allocated to the company should be deducted from the company without benefiting from taxable benefits to shareholders. The tax court has agreed with the taxpayer that these restructuring costs are duly deducted by the company as legitimate business expenses. In this case, there were two active shareholders who both passed into estate blockages concluded at the same time. This process has also resulted in significant costs for updating and revamping the shareholder contract.
The tax court also found that the shareholders` pact was of great importance to the protection of the company in its dealings with shareholders and found that the costs incurred for the redesign of the shareholder contract were not personal expenses of the shareholders. It is interesting to note that the tax court authorized the company, since the shareholder contract was rewritten and reformulated, to also deduct the total cost of legal fees as current expenses, as opposed to capital charges, and compared the redesign of the shareholder contract to the maintenance and repair of an asset of the company. The financial court found no evidence of payment or conspiracy benefited the company. It therefore concluded that the payments did not match the deduction tests. Since the taxpayer did not clearly demonstrate that the finding of the facts was wrong, the First Circuit Court of Appeals upheld the tax court`s decision. The company was denied the deduction and the taxpayer was forced to declare a constructive dividend corresponding to the legal fees paid on his behalf. The IRS and the courts generally evaluate the second test based on the origin of the doctrine of rights. These are the factors that led to the litigation, not the result. It doesn`t matter that an indispensable employee was involved and that the company would have a hard time surviving without him or her. When the second test is applied to this case, the subject must demonstrate that the illicit activities that were created or that were carried out in the vicinity of the activities of the companies are unaware of the effects of a conviction on the shareholder or on the company.
The following expenses were considered deductible from the company`s profit. Kenneth Guarino founded Capital Video Corp. to broadcast pornographic videotapes. Fearing that organized crime would try to seize the business or interfere in its other affairs, Guarino paid $1,728,000 in tribute to Natale Richichi, a famous crime chief. The payment should help Richichis avoid problems. Guarino helped Richichi hide the payment from the IRS and conceal other assets from the government. Both men were charged with conspiracy and fraud. Capital Video paid and withdrew $250,000 in 1996 and $517,000 in 1997 for Guarinos` legal fees. The IRS disputed the deductions and declared that the payments constituted a constructive dividend for Guarino. The Tax Court ruled for the IRS and the taxpayer appealed.
Ask us if any of the above points are relevant to your tax issues.