Defense Lawyer Deductible?

The Federal Tax Court, BFH, was presented a case in which it to decide whether or not the legal costs in penal trials can be deducted as income related expenses or not. It published its judgment on October 18. 2007, (re VI R 42/04).


§4 IV EStG defines as an operational expense (Betriebsausgabe) all costs related to running a business. §9 I 1 EStG explains the term “Werbungskosten” (income-related expense) as expenditures to obtain, secure, and maintain one’s income. The court held that the fees of a defense lawyer are generally deductible, when they are professionally or operationally caused. When this will be the case, will be scurrility examined: Required is that the imposed act has been committed during a professional activity. This will be the case when it can be directly and exclusively be explained from a professional or operational activity.

In the reported case, the manager of a GmbH committed a crime during his professional actions. (The court did not publish this fact.) The tax office and the lower court denied the wrong deduction that committing a crime has nothing to do with one’s job or running a business. The BFH insisted that tax law is neutral. A typical example for this concept from the income perspective: Income from running a prohibited bordello is taxable. In other words, you have to pay taxes as if this business were legal. Returning now to the topic of this article (deductibility), whenever you have an expense related to your business or your employment, it will be deductible – unless it is not deductible for other reasons like in §§4 V, 12 EStG.

There is a sharp line between private and income-related origination. When a penal act has only been “covered with the operationally related coat” then the legal costs of defense share this nature too and will not be deductible. A typical example from case law: When damaging one’s employer might seem income related but courts will not accept this. The main inducement was not do one’s work as an employee but to enrich oneself.


Published on the old CMS: 2008/August/03
Read on the old CMS till November 2008: 1699 reads

Additional information