Have a self employed insurance agent who represented company A and left for company B. Began soliciting customers from company A. Company A then sued for breach of covenant not to compete for two years. The question is deducting 1) legal fees, and 2) settlement costs. The only citation I can find is Pub 529 which says:
"Damages for Breach of Employment Contract - If you break an employment contract, you can deduct damages you pay your former employer that are attributable to the pay you received from that employer."
http://www.irs.gov/publications/p17/ch28.html
1) I read this to mean either W2 or self-employed contracts and also compensatory versus punitive damages. I believe the settlement is being viewed more as compensatory. So would that be a yes on deductability?
2) Legal fees I'm applying the standard rule of collecting and preserving income. However, that doesn't seem to be the case here. Its to compensate the employer for lost income. Unless you argue its to continue collecting from these same customers in violation of the contract especially since he's self employed. So would that be a yes here too on a deduction?
Update: I’m taking it from the non responses that these deductions for business are never questioned?