attorney fees

[mpasseck]

I have a client who was a w-2 employee separated service and sued to challenge his non compete 20 mile radius as to prohibitive.  He has been able to obtained contract work at a considerable distance and is facing having to sell houses and move to be closer to the hospital (required).  Now his suit was unsuccessful can he deduct the attorney fees.

It seems to me that they are for the protection and ability to earn a living locally.  but may be a stretch to associate them with his contractor work (self employeed) that is out of town.

[qbteachmt]

Personal legal costs ("was a w-2 employee" and "sued to challenge his non compete") are Misc deductions and not Business deduction.

"they are for the protection and ability to earn a living locally"

20 miles is still pretty much Local. Do you have IRS info showing otherwise?

[mpasseck]

His non compete bars him from working within 20 miles which is forcing him to find work over 100 miles away from his home.  He challenged the non compete to allow him to contract closer to home.  I think that it would be aggressive to say that the fees are related to his ability to secure contract work and am asking for any information and opinions.

[BobKamman]

His status as a former W-2 employee is a red herring.  Is the local work he hopes to do also as an employee, or as self-employed?  (Apparently he no longer hopes to do it, since he lost, but his status as self-employed outside the local area may be significant.)  

20 miles is a smaller radius than most non-competes. Courts look at the distance (50 miles is often used) and the time period (three years might work; forever, not so much).  

[mpasseck]

he hopes to get contract (self employeed) work closer to home.  already lost with the court on the non compete now wondering if there is a way to deduct legal costs

[qbteachmt]

Personal misc deductions are subject to a floor, so it's hard to know if there will be any benefit as deduction.

[BobKamman]

The deduction on Schedule C is not subject to a floor.  

[qbteachmt · Accepted solution]

That's correct; there needs to be the determination of Personal or Business.

Example:

https://www.currentfederaltaxdevelopments.com/blog/2017/7/14/legal-fees-related-to-employment-not-ta...

[mpasseck]

Thank you that is what I was looking for

[BobKamman]

First, it should be noted that Dulik is a Tax Court summary opinion; pursuant to section 7463(b), the decision was not reviewable by any other court, and the opinion shall not be treated as precedent for any other case.

Then, if you read the case, you will find that there were a number of other issues involving the taxpayer’s employment, and the legal fees were paid in the three months after he was terminated and before he started any other business activity.

[qbteachmt]

"I think that it would be aggressive to say that the fees are related to his ability to secure contract work and am asking for any information and opinions."

The link I gave would support that opinion, that it is a stretch to relate that expense to defend income earned at that time. Because of this comment:

"he hopes to get contract (self employeed) work closer to home."

Which is part of scenario in the link I gave, matching this comment: "and the legal fees were paid in the three months after he was terminated and before he started any other business activity."

I'm not an attorney, but you asked for information that might be applicable. The timeline seems to be: terminated with a clause that was not fought at that point. Then, decided to fight the clause. Then, found some work.

[mpasseck]

I think it is aggressive also just wanted to give my client something to think about.  I feel the central issue is the origin of the legal fees being employment related (employee) I wonder if the court would have felt differently if the suit was for violation of the non-compete ?  but I think that would also be a stretch and hard to separate from the origin of employee related

[BobKamman]

I see the timeline as found some work, started work and made some 1099 income,  then wanted to find more work.  

[mpasseck]

honest timeline was turned down from jobs due to non-compete found work at a considerable drive over 100 miles away then tried to challenge 20 mile radius of non-compete to be allowed to find work closer to home.  I think being proactive may have hurt him in this case and he might have been better to have been sued for violation of the non compete.  It is a muddy one so I will let my client make the decision I can see the (conservative) position that this is still employee related and a now non deductible misc itemized deduction.  I am not good at finding court cases I guess I will never know the right key words to narrow the results but would be interested in an apposing win by a taxpayer deducting legal fees in similar circumstances.

[qbteachmt]

"but would be interested in an apposing win by a taxpayer deducting legal fees in similar circumstances."

As a Business Deduction? You might have a further complication such as, the employee typically gets a payment in consideration for the termination that includes a do not compete clause.

Have you spoken with their attorney? This specific clause is not really a tax issue but a legal one.

Meanwhile, you can certainly read resources and even case law, over the web. You don't even have to go to the local law library to read case law. You used to have to do this for State guidance, for example.

Search the web, such as:

https://www.thebalancesmb.com/non-compete-agreements-and-tax-deductions-398967

http://www.scnoncompetelawyer.com/noncompetes-in-court-attorneys-fees/

[BobKamman]

Wait a few years until cases like yours make their way into the court system. Until the death of miscellaneous deductions in 2017, it didn’t make that much difference whether something could be claimed on Schedule A or Schedule C. In the Dulik case, I’m wondering whether there were some AMT issues.

And ignore Tax Court “small” cases, like Dulik, where the taxpayers don’t have a lawyer. As the opinion notes, “Petitioners do not assert that the claim against Nycomed was rooted in Mr. Dulik’s consulting business.” Nothing like conceding the issue with your own testimony. If your client wants to assert that the legal fees don’t relate to his new work, then tell him to forget about it.