Rev. Rul. 86-3

1986-1 C.B. 81, 1986-2 I.R.B. 4.

BUSINESS EXPENSES; STATE LEGISLATOR; LEGAL EXPENSES

Published: January 13, 1986

Section 162.-Trade or Business Expenses, 26 CFR 1.162-20: Expenditures attributable to lobbying, political campaigns, attempts to influence legislation, etc., and certain advertising

  Business expenses; state legislator; legal expenses. A politician may not deduct legal fees under section 162(e)(2) of the Code paid to defend against criminal charges arising from participation in a political campaign in support of a candidate for political office.

ISSUE

  If a politician makes expenditures for legal fees to defend against charges of buying votes in an election, are the expenditures deductible under section

162(a) of the Internal Revenue Code?

FACTS

  A performed voluntary campaign work on behalf of a candidate in a party primary election for a county law enforcement office. A was indicated for buying votes during the course of this campaign work. A paid substantial legal fees in connection with the defense of the criminal charges. At the time the alleged illegal acts were committed, A was a state legislator and an independent businessman.

LAW AND ANALYSIS

  Section 162(a) of the Code provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

  Section 162(e)(2)(A) of the Code provides, in effect, that no trade or business expense deduction shall be allowed for any amount paid or incurred for participation in, or intervention in, any political campaign on behalf of any candidate for political office.

  Section 1.162-20(c)(1) of the Income Tax Regulations provides, in part, that expenditures for political campaign purposes (including the support of, or opposition to, any candidate for public office) are not deductible.

  The deductibility of expenses for legal fees depends on the factual context in which the expenses originate. See United States v. Gilmore, 372 U.S. 39

(1963), 1963-1 C.B. 355. Thus, whether a taxpayer ultimately is convicted of a criminal offense does not determine deductibility under section 162(a) of costs for defense. A taxpayer may therefore deduct expenses that are incurred for legal fees in an unsuccessful defense against criminal charges if the charges grow out of activities in the taxpayer's trade or business and the expenses are otherwise deductible under section 162(a). See Commissioner v. Tellier, 383 U.S. 687 (1966), 1966-1 C.B. 32.

  For purposes of section 162 of the Code, the office of a state legislator is a 'trade or business.' Section 7701(a)(26) of the Code provides that the term

'trade or business' includes the performance of the functions of a public office. See Rev. Rul. 84-110, 1984-2 C.B. 35. Therefore, legal expenses incurred 'in carrying on' the trade or business of being a state legislator are deductible, unless they are made nondeductible by specific provisions of the Code or regulations.

  In the present situation, the criminal charges in connection with which A incurred legal fees grew out of A's participation in a political campaign in support of a candidate for public office. Expenditures for purposes of such political campaigns are not deductible under section 162(a) of the Code. See section 1.162- 20(c)(1) of the regulations. The charges against A grew out of a factual context, a political campaign, in which A's expenses are not deductible. A's legal fees in contesting the charges, therefore, are, likewise, not deductible.

HOLDING

  Under section 162(e)(2) of the Code, A may not deduct legal fees paid to defend against criminal charges arising from A's participation in a political campaign in support of a candidate for public office.

Rev. Rul. 86-3, 1986-1 C.B. 81, 1986-2 I.R.B. 4.