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not deduct, as an itemized deduction, any expenses related to the
malicious prosecution lawsuit.
Respondent on March 27, 2002, issued to petitioner a notice
of deficiency. In calculating the subject tax deficiency of
$157,357, respondent included in petitioner’s gross income the
full amount of the lawsuit settlement proceeds and treated the
attorney’s fees and other expenses incurred in connection
therewith as a miscellaneous itemized deduction. Respondent
further determined that petitioner was liable for the section
6662(a) accuracy-related penalty in the amount of $31,471 on
account of negligence or disregard of rules and regulations.
After the instant case was commenced, the parties submitted
stipulations of settled issues addressing certain of the
adjustments made in the notice of deficiency. As regards the
itemized deductions, specifically the contingent attorney’s fees
paid directly to Mr. Riley, the parties stipulated:
In the Notice of Deficiency, Respondent allowed
Petitioner’s contingent attorney’s fees as an itemized
deduction. Venue for appeal lies to the Court of
Appeals for the Fifth Circuit. The parties agree that
Petitioner’s gross income from the damage award does
not include the portion of the award paid directly to
her attorney, and Petitioner is not entitled to an
itemized deduction for the attorney’s fees paid to her
attorney. See Srivastava v. Commissioner, 220 F.3d
353, 365 (5th Cir. 2000), rev’g and remanding in part,
and aff’g on another issue, T.C. Memo. 1998-362.
Concerning the penalty, their stipulation reads:
The parties agree that if it is determined that
there is an underpayment of Petitioner’s 1998 income
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