The U.S. Tax Court has ruled against a Texas corporation that attempted to deduct a $2.3 million wrongful death settlement from its tax returns. The company’s sole shareholder and CEO argued that the company’s “direct exposure to the risk of a monetary judgment” allowed it deduct the settlement as a business deduction, but the Tax Court found that the expense did not arise from the company’s profit-seeking activities.
Texas residents who file inaccurate or illegal tax returns can potentially face tax audit fraud cases, which can result in harsh penalties. This makes it important for anyone accused of failing to properly file their tax returns or submitting inaccurate information to contact a qualified attorney to ensure their rights are protected and their interests properly represented. This case could have been a misunderstanding on the part of the filer.
A Texas woman filed the wrongful death lawsuit after her daughter, an employee with the CEO’s company, fatally overdosed on cocaine while on a trip with the CEO, who was her boyfriend. The lawsuit names the company and the CEO as co-defendants. The company ultimately settled for $2.3 million, but then deducted that amount from its 2005 and 2006 tax returns. The company contended that the settlement constituted a corporate business expense.
But the claim was not without precedent. For instance, the settlement costs incurred by a pizzeria employee who causes an accident while rushing to deliver a pizza could generally be deducted as a business expense. However, this is because that accident occurred as the driver was using company property in order to contribute to the employer’s profits. The Tax Court ruled that was not the case in this instance.
Source: Forbes, “Tax Court: Corporation’s $2.3 Million Settlement Payment For Wrongful Death Of Shareholder’s Girlfriend Was Not A ‘Business Expense’,” Tony Nitti, Nov. 27, 2012