Malpractice insurance.

In a pro-taxpayer decision that has ramifications for professionals of all types, the Tax Court held in Merlin A. Steger, 113 TC No. 18, that a retiring attorney could deduct in full in the year of purchase the cost of a "nonpracticing malpractice" insurance policy.

The taxpayer was self-employed and retired from the practice of law in 1993. That year, he exercised an option under his lawyer's professional liability insurance policy to purchase nonpracticing malpractice insurance coverage to cover him for an indefinite period after retirement against "acts, errors or omissions" committed before retirement.

The taxpayer deducted the $3,168 premium on his 1993 Schedule C. The IRS denied the deduction, claiming that the policy was a capital asset and that only 10% of the policy cost was deductible that year.

The Tax Court disagreed, finding that the taxpayer had the right to deduct the full policy cost in 1993, under alternative bases. First, the policy was not a capital asset; rather, it was an intangible asset with no ascertainable useful life, providing the taxpayer with malpractice coverage for an indefinite term of years. According to the court, even if the policy were a capital asset, the taxpayer would be allowed to deduct its full cost in 1993, the year he ceased business operations.

Alternatively, the policy cost was deductible currently as a ordinary and necessary business expense in closing the taxpayer's business.

This decision has potentially wide-ranging application to other types of professionals who purchase retirement malpractice liability insurance, including CPAs and physicians.