IRS Chief Counsel - Legal fees, costs relating to workers’ compensation claims not specified liability losses 

March 10: The IRS posted a “redacted” field advice memorandum* concluding that a taxpayer’s legal fees and costs incurred in contesting or investigating workers’ compensation claims were not to be treated as specified liability losses under
section 172(f). 20141002F (release date March 7, 2014, and dated January 28, 2014)

The taxpayer asserted that:

  • Legal fees and related costs it incurred in contesting or investigating workers’ compensation claims were required to be paid by state workers compensation laws and, accordingly, may be treated as specified liability losses (SLL)
  • Other expenses were required to be paid by state workers compensation laws and, accordingly, also may be treated as SLL

The IRS answered that the taxpayer had not established that: (1) provisions of the state (California, Oregon, and Washington) workers compensation acts required the taxpayer to pay the legal fees incurred in contesting or investigating workers compensation claims and the other expenses not deducted from the applicants’ indemnity benefits; and (2) the acts (or failures to act) giving rise to these legal fees and expenses occurred at least three years before the beginning of the tax year as required by the three-year rule of section172(f)(1)(B)(ii)(I).

The IRS also found that the premiums paid to purchase workers compensation insurance typically do not qualify as SLL Accordingly, the IRS memo finds it is not necessary to treat the legal fees and other expenses incurred by the taxpayer as SLL to place it on an “equal footing” with employers who purchase workers compensation insurance.

Read the field advice memo [PDF 210 KB]

*Field advice memo documents are prepared by IRS field attorneys in the Office of Chief Counsel, are reviewed by an Associate Office, and are subsequently issued to IRS field or service center employees. The memo cannot be used or cited as precedent.

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