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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.
OPINION
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