Christine Kenton & Greg Braden - Page 5

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          paid on the arbitration award in 2001.  Petitioners do not now              
          contest that the $148,744 constitutes income to petitioner.                 
               Also, on the Schedule C to petitioners’ amended 2001 joint             
          Federal income tax return, petitioners claimed a business expense           
          deduction of $65,676 in legal fees relating to the lawsuit and              
          the arbitration award.                                                      
               Further, on petitioners’ amended 2001 joint Federal income             
          tax return, petitioners claimed additional itemized deductions in           
          the total amount of $8,520 relating to business use of                      
          petitioners’ home, travel expenses, business expenses, real                 
          estate taxes, and charitable contributions.                                 
               Respondent now concedes that petitioner incurred $59,498 in            
          legal fees relating to the arbitration award, and respondent                
          would treat the $59,498 as miscellaneous itemized deductions, not           
          as Schedule C business expenses, and as subject to the AMT and to           
          the 2-percent floor.                                                        
               Respondent also determined against petitioner an accuracy-             
          related penalty of $6,561.1                                                 

                                       OPINION                                        
               Generally, legal fees are deductible on a Schedule C only if           
          the matter with respect to which the fees were incurred                     


               1  The tax treatment by petitioners and by respondent of               
          portions of the $756,392 arbitration award which were paid by the           
          Company in 2002 and 2003 are not in issue in this case.                     





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