Any expenses incurred during the taxable year with respect to trade or business allowed as deduction. The expenses include reasonable allowance for salaries or other compensation for personal services, traveling expenses, rentals or other payments for the purpose of trade or business. 212 of Internal Revenue Code Under this section, the expenses in connection with collection of income are allowed for the taxable year. The expenses may relate to production or collection of income, expenses for the maintenance of property in connection such collection income, collection or refund of tax etc.
DISCUSSION Legal fees incurred in a taxable year can be deductible either Section 162 or Section 212 if such expense is related to the income producing activity. Such payment to an officers, directors, employees or agencies may be one factor that leads to Federal corporate investigation. The Internal Revenue Code did not express any legal fees. However Sec. 212 describes that any expenses which relates to production or collection of income is allowed as deduction. But such expense must be ordinary, necessary and reasonable with direct connection of trade or business.
CASES 1) In the year 2003, Securities and Exchange Commission imposed a penalty on MCI for $500 million on account of fraud. Due to such incident of fraud, at about $1. 5 billion was shelled out by the Securities industry for that year. But out of $500 fine, $50 only deductible. The remaining $450 disallowed as it is nondeductible fine or penalty. 2) Case: Indopco, Inc V Commissioner of Internal Revenue. In this case, the petitioner corporate made expenditure and claimed for deduction which is connected with investment banking fees and expenses.
The expenditure incurred with the friendly acquisition in turn the corporation become wholly owned subsidiary. In this regard, the commissioner disallowed the expenditure. However the petitioner sought reconsideration in the TA Court stating that the expenditure is made as legal fees and related the acquisition of business. The Tax Court also rules that stating that the said expenditure relates to capital nature and hence not deductible under Sec. 162 (a) of the Internal Revenue Code.
The Section 162 indicates that the expenditure must be related to ordinary and necessary business expenses. Here it is not ordinary business as the expense made to acquire the business. Though expenditure may be necessary but it is not ordinary business. Therefore petitioner’s expenses not qualify for deduction under Sec. 162 (a). The burden of proof lies on the petitioner to show that that the expenditure not relates to capital nature. SUMMARY Sec. 162 or 212 indicates the expenditure allowed in case the expenditure relates to the trade or business.
But such expenditure must be in connection with ordinary business and such expenditure is necessary to meet the ordinary situation. Besides the expenditure must relate to revenue nature and not be in capital nature. The incurred expenditure should be done in order to carry the trade or business. To get eligibility of deduction of expenditure under 162 or 212 of Internal Revenue Code for any taxable year, the following are inevitable: -said expenditure relate to revenue nature -said expenditure relate to ordinary and necessarily -said expenditure relate to carry or to trade the business -said expenditure must not be related to capital expenditure nature.
1. http://www. freetaxstrategies. com/articles/Entrepreneurs/Business_Tax_Deductions. php 2. http://www. taxalmanac. org/index. php/Sec. _162 3. http://www4. law. cornell. edu/uscode/html/uscode26/usc_sec_26_00000162----000-. html 4. http://www. aicpa. org/PUBS/taxadv/online/jun2005/wood. htm 5. http://docs. justia. com/cases/supreme/503/79. pdf