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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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Last modified: May 25, 2011