Boulware Redux - Attorneys Fees from Shareholder's Criminal Case Not Deductible by Corporation (4/14/13)

This is more or less a whimper from the past.  Readers may recall the Supreme Court decision in Boulware v. United States, 552 U.S. 421 (2008), here.  See also Boulware Wins the Battle Only to Lose the War (FTCB 3/9/09) , here (discussing the Ninth Circuit's opinion on remand from the Supreme Court.).

In HIE Holdings v. Commissioner, 2013 U.S. App. LEXIS 6952 (9th Cir. 2013), here, Boulware and his related corporations suffered the civil tax fall out from the criminal case.  The opinion is a nonprecedential opinion.  Many such opinions are cryptic; HIE Holdings is cryptic, but the key point for this blog is clear.  I quote the relevant portion in full:\

This appeal concerns tax positions filed by Hawaiian Isles Enterprises, Inc.  (HIE) and HIE Holdings, Inc. (Holdings). First, the founder and controlling shareholder of HIE and Holdings, Michael Boulware, faced criminal and civil litigation for fraud and tax evasion. HIE and Holdings paid Boulware's substantial legal defense fees and claimed these fees as deductible business expenses. * * * * In a thorough opinion, the Tax Court, for the most part, agreed, characterizing most of the legal fees as Boulware's personal expenses * * * *.  We affirm the judgment of the Tax Court. 

A. Legal Fees 

Boulware's contested legal defense fees are not an "ordinary and necessary" business expense under I.R.C. § 162(a) as they do not "arise[] in connection with the . . . profit-seeking activities" of HIE or Holdings, but instead spring from the personal fraud of Boulware. United States v. Gilmore, 372 U.S. 39, 40, 48, 83 S. Ct. 623, 9 L. Ed. 2d 570, 1963-1 C.B. 356 (1963). Nor are these fees theft losses under I.R.C. § 165(e), as HIE and Holdings knowingly paid for Boulware's fees. Taxpayers' attempt to raise the issue of the Lee expenses for appeal in a footnote fails under United States v. Strong, 489 F.3d 1055, 1060 n.4 (9th Cir. 2007) (holding that "[t]he summary mention of an issue in a footnote, without reasoning in support of the appellant's argument, is insufficient to raise the issue on appeal" (internal quotation marks omitted)). Taxpayers' attempt to object to the Tax Court's treatment of their bad debt is similarly unavailing, as the Tax Court's judgment was not adverse to the taxpayers on this issue. Finally, the Tax Court did not clearly err in determining that Boulware cannot deduct these fees himself as ordinary and necessary expenses of his systemic wrongdoings, as his various schemes did not amount to a trade or business, even an illicit one.

This is so cryptic that, from the opinion, not everything said under "Legal Fees" is clear.  Still, it is clear that the Tax Court's denial of those legal fees was affirmed.  The next related questions, not answered, is whether the corporations' payment of those legal fees would be either compensation or dividend distributions to Boulware and, if so, Boulware could himself deduct those fees (subject to any limitations on deductions).