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DeCastro obviously represented the Thompsons in “proceedings
involved in determining the extent of tax liability or in
contesting * * * tax liability.” The Thompsons hired him to
resolve their tax problems. He did so, not only by negotiating
the settlements with McWade but also by appearing on behalf of
the Thompsons at the trial of the test cases in 1989.
Additionally, after respondent had discovered and disclosed the
misconduct of respondent’s counsel, DeCastro successfully
enforced the terms of the new settlement, over respondent’s
objections, in the Tax Court. The Thompsons’ payments to
DeCastro clearly satisfy the definition of deductible legal fees.
Petitioners complain that, in view of DeCastro’s fraudulent
deal with McWade, DeCastro’s legal fees fail to meet the
statutory requirement that they be “ordinary and necessary”
expenses of the Thompsons. Petitioners’ complaint ignores the
Supreme Court’s holding in Commissioner v. Tellier, 383 U.S. 687
(1966), that legal fees otherwise qualifying as ordinary and
necessary expenses are deductible without regard to public policy
objections. Although DeCastro appears to have participated in
the fraud on the court, his fees remain deductible for tax
purposes; the basic proposition is that “the federal income tax
is a tax on net income, not a sanction against wrongdoing.” Id.
at 691. Moreover, “With respect to deductions, the basic rule,
with only a few limited and well-defined exceptions, is the
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