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are deductible if the suit against the taxpayer ‘arises in
connection with’ or ‘proximately results from’ the taxpayer’s
business or profit-seeking activity.” O’Malley v. Commissioner,
91 T.C. 352, 362 (1988)(quoting United States v. Gilmore, 372
U.S. at 48).
Although employment-related legal fees are deductible under
section 162 or 212, if the taxpayer’s trade or business consists
of the performance of services as an employee, then the expenses
are not deductible from gross income. Instead, they are treated
as a miscellaneous itemized deduction, subject to the limitations
of section 67(a).
Petitioner contends that she filed the State court lawsuit
in her capacity as an independent contractor, individually or on
behalf of Neena Mosha, and that the origin and nature of the
claim clearly arose in connection with this business activity.
See also Silberman v. United States, 40 Fed. Cl. 895 (1998). As
noted above, we found that petitioner was an employee of Mr. Gans
and his related businesses and not an independent contractor.
Therefore, petitioner is not entitled to deduct legal expenses
arising from the settlement on her Schedule C but rather her
legal fees and costs are deductible on Schedule A as an itemized
deduction, subject to limitations.
Settlement Portion to Former Spouse
Petitioner contends that $3,728.65 of the settlement award
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