Expert: John Kirk, CPA Date: 7/25/2008 Subject: S- corp and legal fees
Question I own an S- corporation. I sued on behalf of myself and the S-corporation to collect income that would have been taxable (to the S-corp) if I had won the suit. I lost the suit. Does that count as “attempting to produce or collect taxable income”? I claimed it as a misc deduction as I paid the fees from my personal account since the S-corporation is inactive. If the misc deduction is disallowed since I lost the suit and no taxable income was received could I now file an S-corp return and generate a loss. This would be the only activity of the S-corp.
Thanks
Answer The answer depends on if there was a valid sale. Your question seems to indicate that the court found that it was not income.
If so, what is it?
Since the income was not valid, no income should have been recorded, so a reversal of the income is required and the legal expense associated with the collection is a valid legal expense to the corporation.
We would need to see the court's opinion to further anaylse the transaction.
