Sorry, one last bit you might be interested in. Since yes this could be a legal drama there is support for the obligation not many CPA's I know are aware of.
A client of mine a few years ago paid out significant amount to settle debt, and was able to deduct it. We hire a high buck legal firm to provide that tax basis and letter for the deduction based on obscure rule. Without getting into the nitty gritty, the main point was to protect is name, reputation, and future business reputation. See IRS Rev Rul 73-226. Though I was vaguely aware of this I had no actual usage and therefore requested he see a law firm are larger cpa firm. He paid for the legal tax opinion. There is an acquisition of goodwill and a "preservation" of goodwill which are deductible but treated differently, the acquis is 15 year am, preservation is deductible currently.
This leads to this discussion and to the legal obligation. One my client would get sued by the attorneys that represented him as former president of the co, he'd mostly likely lose, it was related to existing legal business of the co. but what he thought had ended dragged on. He is more than comfortable taking that stand and the attorney's back it up in writing. This also could be seen as a preservation of goodwill. Though we aren't taking that stand and deducting it, he'd rather take the capital loss and be less aggressive, but should he get audited, its' nice leverage. This is smaller dollars the original client case was for high six figures. That's preservation of GW!!!
Definitely its a case by case area and for large $$ worth getting a legal opinion covering it.
