Question

Walter recently received a notice of an income tax deficiency of $21,000 from the IRS. He hires an attorney to handle his IRS problems. Walter's legal expenses are $4,000. Can Walter deduct the legal expenses?

I. He can deduct the full amount if the tax deficiency relates to his business.
II. He can deduct the full amount if the tax deficiency relates to income other than business income.
III. He can deduct the legal fees if the income tax deficiency is personal in nature.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and II are correct.
e. Statements I and III are correct.

Answer 1

Walter cannot deduct the legal expenses as a business expense but he can deduct the legal fees if the tax deficiency relates to income other than business income.

Step-by-step explanation:

Walter cannot deduct the legal expenses as a business expense (Statement I) because the tax deficiency does not relate to his business. However, he can deduct the legal fees if the tax deficiency relates to income other than business income (Statement II). Therefore, the correct answer is e. Statements I and III are correct.