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Monday, November 28, 2016

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Chanson de Roland

While the deductibility of settlements as a business expense is debatable, it is not as easy a question of right or wrong as it may seem. Every active business of any size will be sued; it is simply part of and a cost of doing business. Some of those suits will have merit, while others won't, but suing and particularly being sued or at least the risk of being sued is part of being in business. So the question becomes this: If being sued is part of being in business, then why shouldn't at least damages and remedies arising from a civil suit be deductible just like any other business expense? The answer today is that such remedial expense arising from a lawsuit should be and are deductible. Penalties and fines, however, aren't deductible, because committing crimes or engaging in acts involving moral turpitude are not part of the normal and permitted course of doing business and, therefore, are not business expenses and may not be deducted as such.

Where do Donald Trump's settlement of the lawsuit, supra, fit in this framework. Was there a violation of criminal law or even of civil law? Had the case or rather cases gone to trial and criminal fraud or civil fraud or exemplary breach of contract or gross negligence, etc., been proven against Mr. Trump and/or his companies, then perhaps one could make an argument that Trump or his companies had committed a crime or had at least engaged in immoral acts. But that didn't happen here. What happened here was that Trump and the plaintiff and prosecutor settled their dispute, and it is black letter law that a settlement is in the nature of a contract, which does not determine liability or guilt on any of the laws at issue.

Moreover, both the plaintiffs and even more so the prosecutor received an ominous warning from the judge presiding over the case. It was reported that the judge having seem the parties pleadings and dispositive motions had warned the parties that they should settle the case. That is code, which every lawyer well understands, that the judge has problems with the case, and since it is the plaintiff or prosecutor who is alleging wrong, the judge is usually signaling plaintiff or prosecutor that their are weaknesses in his case that may well result in them losing as a result of a judicial disposition. So, while it can't be said with certainty, that the judge was telling plaintiffs that they would lose, a lawyer should urge his client, after such a judicial admonition, to negotiate seriously and accept the best viable offer must, because his failure to do so may result in him losing the case and getting nothing.

So the bottom line is that, whatever the merits of the deductibility of remedies, Trump's settlement, supra, even much more than other settlements, does not support the idea that the deductibility of his settlement is an instance of the tax payers subsidizing a person's, here Trump's, private wrongs, because there was no determination of wrong by trial, and because it seems that the judge thought that the plaintiffs’ case against Mr. Trump was weak.

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