Franklin P. and Nona Coady - Page 4

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          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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