Eldon R. Kenseth and Susan M. Kenseth - Page 14

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               This controversy is driven by the substantial difference in              
          the amount of tax burden that may result from the parties’                    
          approaches.3  The difference, of course, is a consequence of the              
          plain language of sections 56, 67, and 68, so the                             
          characterization of the attorney’s fees as excludable or                      
          deductible becomes critical.  There have been attempts to provide             
          relief from the resulting tax burden by creative approaches,                  
          including attempts to modify long-standing tax principles.  This              
          Court believes that it is Congress’ imposition of the AMT and                 
          limitations on personal itemized deductions that cause the tax                
          burden here.  We perceive dangers in the ad hoc modification of               
          established tax law principles or doctrines to counteract                     
          hardship in specific cases, and, accordingly, we have not                     
          acquiesced in such approaches.  See Alexander v. IRS, 72 F.3d                 
          938, 946 (1st Cir. 1995) (stating that the effect of the AMT on               

               3 Under respondent’s position in this case, the settlement               
          proceeds are included in petitioners’ gross income in full, but               
          the itemized deduction is subject to limitations and is not                   
          available in computing the alternative minimum tax (AMT).  Under              
          these circumstances, it is possible that the attorney’s fees and              
          tax burden could consume a substantial portion (possibly all) of              
          the damages received by a taxpayer.  It is noted, however, that               
          if the recovery or income was received in a trade or business                 
          setting, the attorney’s fees may be fully deductible in arriving              
          at adjusted gross income, thereby obviating the perceived                     
          unfairness that may be occasioned in the circumstances we                     
          consider in this case.  Commentators and courts have long                     
          observed this potential for unfairness in the operation of the                
          AMT in this and other areas of adjustments and tax preference                 
          items.  See, e.g., “State Bar of California Tax Section, Partial              
          Deduction of Attorneys’ Fees Proposed for Computing AMT”, 1999                
          TNT 125-45 (June 30, 1999); Wood, “The Plight of the Plaintiff:               
          The Tax Treatment of Legal Fees”, 98 TNT 220-101 (Nov. 16, 1998).             

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