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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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