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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121178  
Subject: Legal expenses on the private sale of stock Date: 3/18/2013 2:37 AM
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Dear Tax Experts,

In 2011 and the beginning of 2012 I was in a legal fight with a company I held a minority interest in. The result was a settlement that involved the sale of my interest back to the company. Without getting into the details, it was obvious from the beginning that the sale would occur - the only issue really in dispute was valuation.

In 2011 I deducted my legal expenses under schedule A after speaking with a CPA. Now in 2012 I'm stumped. The settlement closed early in 2012 and I had reached a flat-fee agreement with my lawyer and paid those in advance in 2011, leaving only some court reporter and copying costs in 2012. My legal expenses for 2012 were relatively minor (<$1,000). With a 12 year holding period, the amount realized from the sale should be treated as a long-term capital gain.

Now I know I can treat this as a Schedule A item again. That will effectively leave it unreported because those expenses won't exceed 2% of my income. But it leaves me with a question that might not be worth asking a CPA because the resulting tax savings would only be around $125.

The question is, Can I deduct my remaining 2012 legal expenses as part of the "Selling Expenses" I incurred for this transaction?

I said this is only worth around $125 because at most I could use it to reduce my long-term capital gain. Also I'm pretty sure this doesn't matter, but as additional background the settlement proceeds were paid to my lawyer and he paid me from his escrow account.

BTW, IRS publications appear to be intentionally vague on what is "Selling Expenses". It seems to allow legal expenses, including attorney's fees; but it doesn't spell out what that might be in great detail other than for the sale of real property - and that's not really helpful to me here because you could argue that there are strong similarities in my case, even though this is the sale of privately held common stock.

Thoughts? Opinions? If I spend money on a CPA's opinion, I might wind up out the cost of his time and receive no benefit - other than avoiding interest and penalties, assuming I get audited and my mistake is caught. I'm also pretty skeptical about the IRS giving me any help on the matter. I called them last year about if and where I could deduct such an expenses and the two staffers I spoke with both said it was outside their training.

So rather than pursue the matter with a CPA first, I thought I would ask for some free advice here instead. If you guys say it's a matter for a Schedule A, then I'll just leave my gain as-is. If you think I'm on the right track, I'll consider asking a CPA.

Finally I've thought of one additional question, Should the company have sent me any type of tax form (such as a 1099) reporting the sale? I've not received anything and I'm betting I won't.

Thanks in advance,
- Joel
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