Tax Court: Legal Fees Not Deductible for Conduct of S Corp. Sole Shareholder

The Tax Court has denied the deductibility of legal fees incurred to defend a wrongful death suit brought against the sole shareholder of an S Corp. Authored by Judge Holmes in inimitable style, the opinion offers a good discussion of the various instances when a corporation can, and cannot, deduct legal fees incurred on behalf of its employees.

Read the opinion here:
Cavanaugh v. Commissioner, T.C. Memo. 2012-324

Tax Court: Related Party S Corps Can “Share” Distributions to Preserve Losses

The Tax Court found that shareholders in two related S corporations may receive a distribution of intangible assets from one of their S corporations and contribute those assets into another one of their S corporations in order to increase their basis in the latter entity and realize the losses generated by that entity.

The court followed its opinions in Ruckriegel v. Commissioner, T.C. Memo. 2006-78; Yates v.
, T.C. Memo. 2001-280; and Culnen v. Commissioner, T.C. Memo. 2000-139, rev’d and remanded on another issue, 28 Fed. Appx. 116 (3d Cir. 2002) noting that “the fact that funds lent to an S corporation originate with another entity owned or controlled by the shareholder of the S corporation does not preclude a finding that the loan to the S corporation constitutes an ‘actual economic outlay’ by the shareholder.”

The Court noted that “so long as the underlying distributions and contributions actually occurred” it was of no consequence that the petitioner’s actions may have been motivated by tax considerations.

Read the opinion here:
Maguire v. Commissioner, TC Memo 2012-160