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Accordingly, we conclude that petitioners are not entitled
to exclude any part of the $151,200 settlement proceeds under
section 104(a)(2).
II. Deductibility of Legal Fees
Petitioner contends that her legal fees are ordinary and
necessary business expenses deductible under section 162.
Respondent contends that the legal fees are deductible under
section 212(1) as an expense for the production of income and
treated as a miscellaneous itemized deduction under section 67.
We agree with respondent. Such legal fees are deductible to the
extent they exceed 2 percent of petitioners' adjusted gross
income. See also sec. 1.67-1T(a)(1)(ii), Temporary Income Tax
Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988).
We have considered all other arguments made by the parties
and found them to be either irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.
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