Treatment of tax advice and preparation fees.

• Author: Buschel, Stephen R.
• Position: Brief Article

IRS Letter Ruling 0126014 held that, despite being related to several business conducted by the taxpayer, tax advice fees were deductible under Sec. 212 as miscellaneous itemized deductions, subject to the 2% floor. These fees pertained to reporting.

--automobile recordkeeping expenses;

--rental income and expenses; and

--other income and expenses;

Fees also were paid for preparing Schedules C and E.

The ruling stated that, under Temp. Regs. Sec. 1.62-1T(d), a deductible business expense must be directly (and not remotely) connected with the conduct of the business, noting that

property taxes paid or incurred on real property used in a trade or business are deductible, but state taxes on net income are not deductible even though the taxpayer's income is derived from the conduct of a trade or business.

Presumably, in this situation, the income tax is not considered to be directly related to the conduct of the business because it is generated by the business's results.

It seems illogical for the same rationale to apply to fees paid for tax advice and preparation pertaining to generating business results. Accordingly, the letter ruling's reliance on Temp. Regs. Sec. 1.62-1T(d) appears inappropriate.

The "Blue Book" on the Tax Reform Act of 1986 stated:

In general, expenses of producing income other than rental or royalty income are treated as itemized deductions if the related activity does not constitute a trade or business. (Emphasis added.)

Therefore, it is reasonable to conclude that, in establishing the 2% floor for miscellaneous itemized deductions. Congress...