- 4 -
it paid her the $373,307 award as "wages, tips, other
compensation."
On their 1994 Form 1040, petitioners included the $373,307
award in wages, and claimed a $284,082 "above-the-line" deduction
for the amount of the award that was not paid on account of past
earnings. Petitioners claimed and reported on their return that
the $284,082 was received by Ms. Coady as self-employment income,
and they claimed that $168,217 of the legal fees and costs was
deductible from this income, resulting in net income from self-
employment of $115,865.2 Petitioners claimed a miscellaneous
itemized deduction of $53,121 with respect to the remaining legal
fees and costs.
Respondent determined, and reflected in a notice of
deficiency issued to petitioners on December 10, 1996, that
petitioners' 1994 gross income includes the total award of
$373,307. Respondent also determined that petitioners' legal
fees and costs totaling $221,338 were deductible as a
miscellaneous itemized deduction subject to the 2-percent floor
under section 67. Petitioners concede that none of the award,
legal fees, or costs was attributable to self-employment.
Discussion
2Petitioners' allocation to self-employment of legal fees
and costs bears the same ratio (as rounded) as petitioners'
allocation to self-employment of the award; i.e.,
$168,217/$221,338 = $284,082/$373,307.
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