William French Anderson et al v. Comm., CA-10 No. 23-9002, May 17, 2024
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
Second Opinion: Appellate Court Confirms Tax Court Diagnosis – Doctor’s Legal Fees Not Deductible (William French Anderson et al v. Comm., CA-10 No. 23-9002, May 17, 2024)
William French Anderson, considered to be the “father of gene therapy”, was denied deductions for legal expenses of $292,175 and $68,120 on his 2013 and 2014 income tax returns, respectively. In 2006 he was convicted of sexual abuse of a minor (the daughter of his senior lab scientist and business partner) and sentenced to 14 years in prison. He filed numerous appeals, all of which were denied. In the Tax Court, Dr. Anderson argued that his former colleague caused false accusations to be made against him in a ploy to steal his intellectual property. The appellate court found the Tax Court did not err in its determination that the legal fees paid were in defense of his personal behavior, not his professional activities.
The origin of the claim doctrine requires that the tax consequences of a transaction be based upon the facts from which the transaction arose. In this case, the court determined that the legal fees were solely based upon the defense of Dr. Anderson’s arrest and conviction. None of the legal fees were found to be incurred for the defense of an industrial espionage case or related to any business activity.
Tax Practitioner Planning. Questioning the reason behind incurring legal and professional fees should be a regular component of business tax return preparation due diligence.