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controversy here is whether petitioners are entitled to deduct3
any part of the legal fees and costs incurred in his legal
representation before the school board and the subsequent civil
rights legal action. See, e.g., Rutt-Hahn v. Commissioner, T.C.
Memo. 1996-536. Respondent, however, relies on section 265 to
support his determination that these otherwise allowable
deductions may not be deducted if allocable or attributable to
excludable income.
Section 265, in pertinent part, provides:
SEC. 265(a) General Rule.--No deduction shall be
allowed for--
(1) Expenses.-–Any amount otherwise allowable as a
deduction which is allocable to one or more classes of
income * * * wholly exempt from the taxes imposed by
this subtitle, or any amount otherwise allowable under
section 212 (relating to expenses for the production of
income)* * * .
See also Bent v. Commissioner, 87 T.C. 236, 251 (1986) (and cases
cited therein), affd. 835 F.2d 67 (3d Cir. 1987).
Petitioners argue that the legal fees and costs were not
attributable to the receipt of income that is exempted by section
104. Petitioner contends that his purpose in hiring the attorney
2(...continued)
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
3 Petitioners sought the deduction on Schedule A, Itemized
Deductions, and, accordingly, there is no dispute as to whether
their deduction is subject to the limitations connected with such
deductions.
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