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business, legal fees stemming from a taxpayer’s employee status
are not deductible in computing adjusted gross income but are to
be treated only as miscellaneous itemized deductions, subject to
the AMT and to a 2-percent floor. See sec. 62(a)(1); see also
McKay v. Commissioner, 102 T.C. 465, 493 (1994), revd. on other
grounds 84 F.3d 433 (5th Cir. 1996); Test v. Commissioner, supra;
Alexander v. Commissioner, T.C. Memo. 1995-51, affd. 72 F.3d 938
(1st Cir. 1995).
It is undisputed that the origin of the claim with respect
to which the Company paid the $148,744 relating to the
arbitration award stemmed from petitioner’s status as an employee
of the Company. Therefore, the related legal fees incurred by
petitioner are not deductible on petitioners’ Schedule C.
We conclude that the legal fees of $59,498 petitioner paid
to her attorney relating to the arbitration award are deductible
only on petitioners’ Schedule A, are subject to the AMT, and are
subject to the 2-percent floor on miscellaneous itemized
deductions.2
2 We understand that the application of the alternative
minimum tax (AMT) and the 2-percent floor effectively will
eliminate most of the tax benefit of petitioners’ Schedule A
deduction for the legal fees. Sec. 56(b)(1)(A)(i). We also note
that, under the American Jobs Creation Act of 2004, Pub. L. 108-
357, sec. 703, 118 Stat. 1546, sec. 62(a) was amended, effective
Oct. 22, 2004, and legal fees relating to certain discrimination
lawsuits (including lawsuits similar to petitioner’s lawsuit
against the Company) paid after Oct. 22, 2004, with respect to
any judgment or settlement occurring after that date are allowed
(continued...)
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