Payer’s Deductions for Judgments and Settlements

[violajr]

I have a client that had to pay over $80k for a judgment to a former client of his for a business that no longer exists.  It is a suit that started over 7 years ago and was just settled in 2023.

From what I have found if the judgement was paid during the course of business / generation of income it can be deducted from his income. 

My question is where would I make this type of deduction?

Any thoughts/insight apricated.

[BobKamman]

What return was the business filing?  Schedule C?  Cash method of accounting?  Where have the legal fees been deducted for the last seven years?  

[violajr]

The business was actually ceased operation.

It was a Schedule C cash.  Legal fees were all paid in 23.

[sjrcpa]

Deduct on Schedule C even if there is no other Sch C activity.

[BobKamman · Accepted solution]

Schedule C with zero income and an $80K deduction.  Attach an explanation.  This would be one of those returns that IRS might not audit because they would figure, "this must be true because no one would make it up."  

Did the litigation really continue that long?  Or did the creditor get a default judgment and it just took this long to collect it?  Doesn't really matter. 

A cash basis taxpayer may deduct ordinary and necessary business expenses, the liability for which arose in the active conduct of a trade or business, even if the payment was made after the termination of that business. Dowd v. Commissioner, 68 T.C. 294, 301 (1977); see also Tolzman v. Commissioner, T.C. Memo. 1981-689. This is also the position taken by the Commissioner in Rev. Rul. 67-12, 1967-1 C.B. 29.