Question

Facts: Paul Willard is a self-employed attorney. Because of erroneous advice that he gave, one of Paul’s clients incurred unnecessary costs of $20,000. The client threatened to sue Paul for malpractice, and Paul reimbursed this sum to his client. Although his malpractice insurance would have covered the payment, he chose not to file for reimbursement. Because he had two recent malpractice claims, Paul is convinced that another claim could cause him to be either uninsurable or insurable only at unaffordable rates.

Issue: May Paul deduct the $20,000 reimbursement paid to his client?

Please solve the conclusion & Analysis:

Conclusion:

Analysis:

Code Section 162

Code Section 165

Based on above Section

Answer 1

Answer:

Paul should deduct the $20,000 reimbursement paid to his client

Explanation:

The discovery of the wrong advice given by Paul to his client led to a negligence practice where Paul failed to offer the required service to the client. Since the client had reported the expense in his books for tax deduction purposes, the client will include the reimbursement in his taxable income and report it as "other income" so that the tax liability reduced in the first instance can be recovered from the same amount.

During the payment of the service by the client, Paul reported the income for tax purposes and when reimbursing, the same amount should be deducted as n expense to help complete the transaction by debiting the amount and crediting the same amount in the books to balance the tax liability (Esterhuizen & Van Schalkwyk, 2011).

Reference

Esterhuizen, C. E., & Van Schalkwyk, C. J. (2011). Income tax nature of reimbursements relating to leasehold improvements (Doctoral dissertation, Stellenbosch: University of Stellenbosch).