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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 2993
Experience:  I've prepared all types of taxes since 1987.
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New tax questions. I had a ranch in Nevada. A woman who was

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New tax questions.
I had a ranch in Nevada. A woman who was kicked out by husband needed a place to live. I let her stay on my property for about 3 years free. I wanted to sell the property. had a buyer willing to pay $200,000 she refused to leave. It look months to get her evicted. She then took legal action -- claimed she was an employee, and/or business partner. This prevented me from selling. she placed a mechanic lien on the property. Some 10 months later it was possible for me to sell the property for $430.000. This time an agent's fee was involved but in any event I benefited from her preventing the sale of the property. The court found that since she didn't have an employment contract and the time period of her claim for no wages was over a year then she could not claim she had been an employee or partner ?? are my costs of trial deductable?
Submitted: 4 years ago.
Category: Tax
Expert:  jgordosea replied 4 years ago.
Greetings,

Much more is needed in order to attempt to answer the question:

Was there a business at the ranch?

What business might deduct the legal expenses? Can we classify the legal expenses as "ordinary and necessary" to that business?

Did the woman have any role in that business? Did you deduct any payments you may have made to her in the past?

If not a business, what was the reason for owning the ranch?
Was any property (building,etc,) of the ranch being depreciated on tax returns?

Were you or the business (if a separate entity) party to the suit?
If she was not an employee what is the money being paid to the woman?
Would that payment have been a business expense if there was no suit?

Thank you for the additional information.
Customer: replied 4 years ago.
Woman with minor child and several horses broke her ankle had no place to go. I let her move on to a old ranch I owned that I was having fixed up to sell. I paid for her necessaries while she went thru a divorce. Nevada has a law that someone (like me) who provides necessaries for a wife is entitled to repayment from the husband. I had to go thru 6 months of arbitration was awarded money, but husband filed for bankruptcy. All this time this woman is living on my property. They I get a buyer for the property for $200,000 and I asked her to leave. She refuses to leave. I have her evicted. She files a law suit and claims she had worked for me for three years and was supposed to get $3,000 salary also a mechanic lien that prevents sale of the property. I paid over $25,000 in attorney fees and costs. The court determined she was not an emplyee or partner as no written agreement but in all fairness she should be paid something because during the litigation the value of the property doubled in value.
Expert:  jgordosea replied 4 years ago.
Hello again,

As there does not seem to be any trade or business for which these legal expenses are an "ordinary and necessary" expense there is no deduction.
All business expenses must be made in the conduct of a trade or business and must be "ordinary and necessary" of that business activity.
See http://www.irs.gov/publications/p535/ch01.html#en_US_publink1000141995 for a more detailed explanation.

From what you wrote you are not required in any way to pay her; but that you feel some moral or ethical obligation to pay her part of the proceeds because while she was stopping you from making the sale the value of the property went up. I would assert that she is not entitled to any share of the gain since it was her intent to harm, and not help, your efforts to sell. From the description, it seems highly doubtful that you would have been able to recover any decrease in value that could have happened during the litigation; so, the fact that you were blessed with an increase in value is not at all of her doing and she should not be paid in my opinion.

Depending on all of the facts and circumstances there is a slight chance that the legal expenses might qualify to be deducted as an investment expense. You would have had to bought and maintained the property as an investment (and not for personal use) and the expenses would have to be for the production or preservation of that income.
For more details on investment expenses see the article at http://www.irs.gov/publications/p550/ch03.html#en_US_publink100010270
If you want to pursue that chance you will need to discuss all of the facts and circumstances with a tax practitioner to see if it may apply. Unfortunately this forum does not allow enough information for me to be able to give such advice.

I hope this helps to know that the legal fees are not a business expense and are not deductible on that basis and that although likely not able to be deducted as an investment expense that possibility can only be ruled out by considering all of the facts and circumstances in your case. From what you were able to tell me it seems it was a personal decision and therefore a personal expense to have the woman on and get the woman off the property.

Best wishes.


Customer: replied 4 years ago.
I got the ranch in 01/2001. The ranch needed to be completed. I had a guy working on the completion but progress was slow. I met this woman who informed me she had 3 construction friends. We agreed that if I paid for her travel expenses from Truckee to Reno and back she would keep track of what her 3 construction friends were doing. This started in March 2002. My intention was to complete the house for a Cert of Occupancy and sell it. A week after this started she had a horse that she was boarding that broke its leg. She asked if she could bring the horse onto my property so she could take care of it. I said ok. By September 2002 she is married and departs. In December she returns, unable to function. Broken ankle. I let her back on the property and pay her necessaries expecting there will be a quick/easy divorce. Husband turned out to be a rat. I had to file a case against him for providing her with necessaries. I showed where during the six month while she was still married I paid out $36,000. The required arbitration concluded I was too generous and awarded me $16,000 but make an error that I had provided her with necessaries of $36,000 which worked out to be an additional $3,000 per month. She represented to the court the word "additional" that she never received was salary. The court concluded she was working for me at $3,000 per month but since we didn't have a written contract they couldn't award her this amount as salary but since because of the huge increase in property values she should get something -- ie. $33,000. Also, I never received the $16,000 awarded in arbitration -- husband left the state.   The property was an investment that I could complete for CofO on the original building permit. If I had sold it "as was" the new owner would have to comply with the new building code. I hired her with payment in the form of paying her expenses. This terminated when she left and got married. 10 weeks I let her return and I paid her expenses. In return she watched over the workers and reported back to me. Would the award money paid to her be taxable to her or to me?
Expert:  jgordosea replied 4 years ago.
<p>Hello again,</p><p> </p><p>Unfortunately this forum does not allow enough information to pass back and forth for me to be able to give informed advice on your particualr situation. That is, each answer I give results in more or different facts. Then, each reply of yours results in more questions I have about the facts. So, my suggestion is to have a face to face meeting where all the facts and questions can be resolved. </p><p>One source you can search by location for a tax practitioners is at https://portal.naeacentral.org/webportal/buyersguide/professionalsearch.aspx</p><p> </p><p>We will be glad to help on this site with any specific questions you may have on tax rules and regulations; but can not give advice since we are not able to get all of the facts writing back and forth. That would not serve you well,at all, for me to try to give an asnwer without being able to ask about all the questions that come up as facts are listed. </p><p> </p><p> If you do have another specific question it can be posted in a new question thread so that one of the experts can give an answer. We thank you for using Just Answer (even if there are some limits on what we can do). </p><p> </p><p>Again, from what you were able to tell me it seems it was a personal decision and therefore a personal legal expense to have the woman on and then to get the woman off the property. </p><p> </p><p>The question of what is taxable to whom is best done in a separate thread. </p><p> </p><p>I hope it was helpful that I could answer your orignal question that the legal fees are not deductible as a business expense. </p><p> </p><p>Best wishes. </p><p> </p>

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