Settlement for Accounting Firm’s Malpractice Isn’t Taxable

That’s what a district court told the owner of an S corporation that recovered the taxes he had to pay because of an accounting firm’s erroneous advice with respect to an S-ESOP. The shareholder paid $2.2 million in taxes, which was recovered from the firm through a malpractice suit. The district court said he could exclude the settlement proceeds because they merely restored him to his position before the loss.

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