Edwin L. Gage and Elaine R. Gage v. Comm., TCM 2023-47
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.
Settlement Payment Given to Attorney Not Deductible Until Delivered (Edwin L. Gage and Elaine R. Gage v. Comm., TCM 2023-47)
The Gages had a protracted dispute with the Department of Housing and Urban Development (HUD). They reached a settlement in 2012 requiring them to pay $875,000 to HUD. In December 2012, the Gages purchased a cashier’s check for $875,000 and gave it to their attorney. Their attorney contacted the HUD attorney and offered the payment, but the HUD attorney would not accept the check until the settlement was finally approved. The Gages’ lawyer held the check. The settlement was approved in March 2013 and the check was delivered to the government.
Cash basis taxpayers deduct an expense when paid. When a payment is made by a check dated in one year and cashed in the next year, the deduction will not be allowed in the year the check is dated absent proof of delivery in that year. Reynolds v. Commissioner, 79 T.C.M. (CCH) 1376, 1383 (2000), aff’d, 296 F.3d 607 (7th Cir. 2002). Because the Gages’ attorney held their check until 2013, they could not deduct the payment on their 2012 tax return.