Legal Definitions - disallowance

Disallowance refers to the official rejection or denial of something that has been requested, claimed, or submitted, often because it does not meet legal requirements or established rules. It signifies a determination that a particular item, claim, or benefit is not permissible.

This term is frequently encountered in various legal contexts:

• In Taxation: When a tax authority, such as the Internal Revenue Service (IRS), reviews a tax return and finds that a taxpayer has claimed an expense, deduction, or credit that they are not legally entitled to, the authority can disallow that portion of the claim. This means the taxpayer will not receive the tax benefit they sought for that specific item, potentially leading to a higher tax liability.

  • Example 1: A small business owner claimed a significant deduction for "office supplies" on their tax return, including purchases of expensive personal electronics like a new gaming console and a high-end television. After an audit, the tax agency determined these items were not legitimate business expenses. The agency issued a disallowance for these specific purchases, meaning the business owner could not use them to reduce their taxable income.

    Explanation: This illustrates disallowance because the tax authority officially rejected the business owner's claim for a tax deduction, determining that the expenses did not meet the legal criteria for business-related office supplies.

• In Bankruptcy: In bankruptcy proceedings, creditors submit "proofs of claim" to the court, detailing the money they believe the bankrupt individual or entity owes them. The court or the bankruptcy trustee reviews these claims. If a claim is found to be invalid, fraudulent, or not legally enforceable under bankruptcy law, the court may disallow it. This means the creditor will not be able to recover that particular debt from the bankruptcy estate.

  • Example 2: During a corporate bankruptcy, a former executive filed a claim for a substantial severance package, citing an old employment contract. However, the bankruptcy trustee discovered that the executive had been terminated for gross misconduct, which, according to the company's updated policies, nullified any severance entitlement. The bankruptcy court issued a disallowance for the executive's severance claim.

    Explanation: This demonstrates disallowance because the bankruptcy court officially rejected the executive's claim for payment, determining it was not a valid or enforceable debt against the bankrupt company's assets under the prevailing legal and contractual terms.