Discussion:Breach of Contract settlement
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Discussion Forum Index --> Advanced Tax Questions --> Breach of Contract settlement
Discussion Forum Index --> Tax Questions --> Breach of Contract settlement
Actionbsns (talk|edits) said: | 18 July 2008 |
| My client is a sub contractor and was working a job when the general stopped making payments. After a bit of time, they walked off the job which later was completed by someone else. They were then sued for breach of contract and it is now about to settle. They will be required to pay a settlement of somewhere around $250,000. These are all the facts I currently have.
They asked me yesterday if the settlement will be tax deductible. I'm not finding much on the topic, can someone direct me to information? I'm thinking it's not because it will be the same as penalties, but maybe there are some caveats that I don't know about. | |
Death&Taxes (talk|edits) said: | 18 July 2008 |
| RIA notes that under the "origin of claim" doctrine, breach of contract has been allowed in connection with employees not fulfilling contract, breaching of franchise agreements, and for failure to carry out duties of a general contractor. In the latter it cites Scallen, Stephen, (1987) TC Memo 1987-412 | |
Actionbsns (talk|edits) said: | 18 July 2008 |
| D&T, not sure I follow what you are saying. | |
Death&Taxes (talk|edits) said: | 18 July 2008 |
| Your client's was sued from of a business transaction, i.e., that is the 'origin of the claim.' In that case, I would think it deductible....this was my instinctive reaction from the first reading of the question. | |
Actionbsns (talk|edits) said: | 18 July 2008 |
| Thanks D&T. I'm researching on Kleinrock and TaxStream, but what I find is all over the place. How can I refine my search to give me information that I can weed through timely? | |
RoyDaleOne (talk|edits) said: | 18 July 2008 |
| This question was answered in another thread.
If you can't find the other thread I'll post some references later. But D&T is being to sound like me dead on. <g> | |
Actionbsns (talk|edits) said: | 18 July 2008 |
| I have an article that discusses Origin of the Claim Doctrine, but mostly from the standpoint of the plaintiff. I'm thinking my client will be able to deduct the settlement, but it's going to be a large deduction and I'm not comfortable with this sole article being my citation and counsel in the event of IRS questions. Roy if you can direct me to another discussion, I'd appreciate it, because using "breach of contract" didn't get me far. D&T as always I appreciate your help. When I entered the Scallen, Stephen cite into Kleinrock it brought up several other T.C.'s, but not that one, any suggestion as to what I'm doing wrong? | |
Death&Taxes (talk|edits) said: | 18 July 2008 |
| I typed the case into Google but it is cited not because of the breach of contract. Quitting for the day | |
Actionbsns (talk|edits) said: | 18 July 2008 |
| Thanks D&T, I'll check that. One other thought, do we need to be concerned with the legal language of the settlement? Certainly I won't be drafting this, but is their any special language I should be mentioning or thinking about? | |
| 19 July 2008 | |
| Not all breach of contract settlements are tax deductible. For example, my contracting business purchases a back-hoe on an installment contract from the vendor and I default on the payment schedule -- the settlement that I pay would need to be capitalized into the equipment account.
In your case, the suit arises out of ordinary business operations and is not related to the purchase of a capital asset. Thus, under the Supreme Court’s origin of the claim doctrine (Gilmore), the settlement would be deductible. | |
Actionbsns (talk|edits) said: | 19 July 2008 |
| Thanks Riley, D&T and Roy. You've been really helpful. I tried Googling the TC Memo from D&T, didn't get anything meaningful - a 600 page document that said it was putting several cases into what sounded like a truncated format, and then I got the resume of apparently the lawyer who worked on the Stephen Scallen case. So I called a local CPA friend who no longer does accounting work. He referred me to a tax lawyer locally who was kind enough to discuss this with me. Between all of you, I'm pretty comfortable with the fact that my client has a deductible item. | |
