Deduction Denied for Legal Fees Incurred during Divorce

News from RWHSG

Posted by Kim Chen on July 13th, 2018

The taxpayer, an investment fund adviser, incurred several million dollars in legal fees during his divorce proceedings. He deducted $1.3 million of the fees for 2010 and $1.6 million for 2011. Legal fees incurred during divorce may be deductible if the spouse is interfering in the taxpayer’s business or the issue relates to taxable alimony income. The significant issue in the divorce was the valuation and allocation of distributions from the taxpayer’s investment advisory business. The taxpayer argued that the fees were deductible under IRC Sec. 162(a) as a business expense incurred to defend a claim for profits earned in his trade or business, or under IRC Sec. 212 as a nonbusiness profit-seeking expense. The Court determined that the taxpayer was not engaged in any business activity during the divorce proceedings, and the claim only arose due to the marriage relationship. Therefore, the Tax Court held that the litigation fees incurred were not business expenses nor were they related to the pursuit of alimony, but were nondeductible personal expenses. Sky M. Lucas, TC Memo 2018-80 (Tax Ct.).