Lars E. Fredrickson, Jr., and Donna J. Fredrickson - Page 8

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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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