The IRS and the courts typically evaluate the second test based on the origin of the claim doctrine. It considers the factors that led to the dispute and not the outcome. It doesn`t matter whether an indispensable employee was involved and the company would struggle to survive without him. When the second test is applied to this case, the taxpayer must demonstrate that the illegal activities related to the business activities of the companies have been or result directly from them, without taking into account the effects of a conviction on the shareholder or the company. There are many reasons why a deduction of legal and professional expenses may be refused: an expense may be considered to be attributable to capital; it may be considered that it is not designed entirely and exclusively for commercial purposes; or it can be considered as an application of gains already made and not as an expense in the calculation of these gains. As you can see, the task of determining if a legal exit can be difficult, consult this office if you need help. Ask us if any of the above points are relevant to your tax matters. Other usual legal fees are taken into account below. In this case, there were two active shareholders who both froze the estate at the same time. As part of this process, they also incurred considerable costs in updating and redesigning their shareholders` agreement.
The Finanzgericht also found that the shareholders` agreement was of great importance for the protection of the company in its relations with the shareholders and found that the costs associated with the recasting of the shareholders` agreement were not personal expenses of the shareholders. Interestingly, since the shareholders` agreement was rewritten and reformulated, the financial court also allowed the company to deduct the full cost of attorneys` fees as current expenses, as opposed to capital expenses, and compared the redesign of the shareholders` agreement to the maintenance and repair of a business asset. While each proceeding depends on its own facts, this decision of the Finanzgericht, in Truck Base Corporation against the Queen, has jurisdiction to assert that the company has its own legitimate interest and that the expenses it entails in relation to those interests should be deductible from the company, even if the shareholders have a strong personal interest in entering into the freezing of the estate or in drawing up a shareholders` agreement. as in this case. However, if the expenses really only benefit the owner/manager and the shareholder (in this case, the expenses related to the creation of the family trust), the legal and accounting fees are a shareholder advantage when paid by the company. What types of legal fees qualify as tax deductions? The taxpayer`s case was significantly weakened because it helped the co-accused conceal income and property from the IRS, acts that would not benefit the company. In addition, the fact that the tribute payments also concerned other undertakings denied the conclusion that the expenditure was ordinarily and necessary for the paying company. Before shareholders` attorneys` fees are deductible, the company must demonstrate that a lawsuit is the direct result of actions taken by the shareholder for the primary profit of the paying business. The courts will generally find that actions that benefit the shareholder or are not directly favourable to the business do not favour its activities. If a company cannot prove an exclusive purpose, the deduction is refused and the shareholder is charged with receiving a constructive dividend. When valuation fees are paid to decide whether a business should be purchased, it is usually a cost of capital and not an allowable deduction.
. . .