Court-Ordered Sanctions Paid by Lawyer Are Not Deductible Business Expenses

tax-form

The United States Tax Court ruled on December 17, 2013 that court-ordered sanctions paid by a lawyer to the clerk of court and to opposing counsel were not deductible business expenses. See Chaganti v. Commissioner of I.R.S., No. 7344-12 (U.S. Tax Ct. Dec. 17, 2013). Section 162 of the United States Tax Code permits the deduction of all “ordinary and necessary” expenses paid or incurred during the taxable year in carrying on a trade or business.

However, the code expressly prohibits the deduction of fines or penalties paid to a government or governmental agency for the violation of any law. See 26 U.S.C. § 162(f). As a result, the Tax Court held that the petitioner’s payment to the clerk of court for being held in contempt was not deductible.

As to the sanctions the lawyer was ordered to pay to opposing counsel (rather than to a governmental agency), the court held that those sanctions were “not ordinary and necessary to the practice of law.” On the contrary, the amount “that petitioner was ordered to pay was not common to the practice of law, nor was it appropriate or helpful to his business.” Deduction denied.