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Posted by D. Stussy on May 8, 2008, 8:39 pm
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> >> Woody wrote:
> >> >>> I am suing a professional for actual damages. When I win, will the
> >> >>> proceeds
> >> >>> be taxable, since they are just to reimburse me for what I lost?
Are
> > my
> >> >>> legal fees tax deductable?
> >> >>>
> >> >>> If it is more complicated than this, what are the issues involved?
> >>
> >> >> It is more complicated. What is the nature of the damage you
suffered?
> >> >>
> >> > My accountant gave me advice which turned out to be seriously wrong,
> >> > resulting in much higher taxes. He had all the information needed to
> > answer
> >> > correctly, but (apparently) chose to make incorrect assumptions
rather
> > than
> >> > looking at the information.
> >>
> >> I found a good overview and discussion of some of the issues involved
at
> >>
> >> www.weitzlux.com/irs/lawsuitsettlements_915.html
> >>
> >> (I have no connection to the publisher of this web site.)
> >>
> >> All income from whatever source is taxable, unless specifically
> >> excluded. Physical injury settlements are specifically excluded,
> >> punitive damages normally are taxable.
> >
> > Right (and that paraphrases IRC 104). However, the key word is INCOME.
> > Not
> > all transfers of money represent income to any/all of the parties
> > involved.
> >
> > Suits of equity are about making one whole for some damage. Income
should
> > be recognized in them only when the payment is to represent income lost
> > via
> > the act of damage (back pay, lost wages, earning potential, etc....) or
> > when
> > it is reimbursement for an amount permitted as a deduction (tax benefit
> > rule). Otherwise, it's not income and therefore doesn't fall under the
> > general rule of inclusion in IRC 61.
> >
> > Punitive damages are a matter of law, not of equity, and that's why
> > they're
> > taxable.
> >
> >> Are you saying that your taxable income would have been the same,
> >> regardless of whether you had received "correct" or incorrect advice?
> >> In other words, the bad advice resulted only in higher taxes on the
same
> >> amount of income?
> >>
> Yes, my income would have been the same in any event; it more or less
comes
> down to improper deduction timing.
>
> Since it is not income, but a damage of avoidable taxes paid, it
presumably
> would not be taxable?
> Would the legal fees still be deductable even if the award is not taxable?
No. Legal fees for non-taxable income are not deductble.
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