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Sexual harassment settlement not deductible.

The girlfriend of a professional football llayer filed a criminal complaint player filed a criminal complaint charging the athlete with sexual offense. At the time, the player was negotiating a contract with his team management, who indicated his employment would be terminated if the incident was made public.

The player arranged a $25,000 payment to the woman in exchange for her dropping the charges and keeping the matter private. On his tax return for the year of payment he deducted the $25,000 as a "professional development expense," claiming that, in light of the threat by the football team, the payment was made to keep his job.

The Tax Court, in Michael Harden v. Commissioner (TC Memo 1991-454) denied deductibility. It cited the U.S. Supreme Court test basing deductibility on the origin and character of the claim to which the payment relates. To be deductible, the expense must have a business origin.

The Tax Court held the reason for the player's payment and the origin of the criminal complaint were two separate items. Since the criminal complaint and charge arose from a personal relationship, and the condition for continued employment was only consequence, no business expense deduction was allowed.

Observation: Tax return preparers must be mindful of the disclosures that might be required for claimed deductions. What might appear at first to be a deductible item may not properly qualify as such when more closely examined.
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Title Annotation:Michael Harden v. Commissioner
Author:Paul, Herbert
Publication:Journal of Accountancy
Date:Jan 1, 1992
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