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In McKenny v. United States, the U.S. Court of Appeals for the Eleventh Circuit addressed a question of first impression: whether the taxpayers’ settlement with their accounting firm, whose negligence allegedly led to a $2 million overpayment in federal taxes to the government, constitutes taxable income. The court also discussed whether the corresponding litigation fees and the difference between the settlements with the law firm and the IRS are deductible. Taxpayers are likely to see McKenny as the baseline for determining the business or personal nature of litigation expenses as well as the deductibility of a settlement with the IRS.
