Lance R. and Elaine C. LeFleur - Page 11

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                  should the allocation between business gross receipts                               
                  and wages [set forth in the primary position] change,                               
                  and/or the allocation between taxable and nontaxable                                
                  settlement proceeds change, then legal fee allocations                              
                  [set forth in the primary position] shall also change.                              
                  Legal fees allocable to nontaxable settlement proceeds                              
                  shall not be allowed and any allocations between wages                              
                  and business gross receipts shall result in                                         
                  proportionate allocations between business expenses and                             
                  miscellaneous itemized deductions.                                                  
                  We must decide whether the express allocation of proceeds                           
            contained in the settlement agreement controls the tax effect of                          
            such proceeds to petitioners.  We must also decide whether legal                          
            fees and costs incurred by petitioners in connection with the                             
            suit are Schedule C deductible expenses or miscellaneous itemized                         
            deductions to the extent that the fees are allocable to                                   
            settlement proceeds that are includable in income.  As a                                  
            preliminary matter, we must address petitioners' contention that                          
            respondent failed to comply with section 7522, and that this                              
            alleged failure justifies a shift of the burden of proof to                               
            respondent in this case pursuant to Rule 142(a).                                          
            I.  Burden of Proof                                                                       
                  Petitioners contend that the notice of deficiency fails to                          
            satisfy the minimum standards required under section 7522 and,                            
            therefore, the Court should, under Rule 142(a), shift the burden                          
            of proof in this action to respondent.  In support of their                               
            argument, petitioners assert that respondent's reasons for the                            
            proposed changes to petitioners' taxable income are not set forth                         

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Last modified: May 25, 2011