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that represents the contingent legal fees paid to petitioner’s
attorney. In Commissioner v. Banks, 543 U.S. 426 (2005), the
Supreme Court just recently concluded that legal fees incurred by
taxpayers under contingent fee agreements could not be excluded
from gross income.
Also, in Test v. Commissioner, T.C. Memo. 2000-362, we
relieved a taxpayer of an accuracy-related penalty relating to
the taxpayer’s erroneous placement of legal costs on a Schedule
C, instead of on a Schedule A.
On the facts of this case and in our discretion, we believe
it inappropriate to apply the section 6662(a) accuracy-related
penalty to the $59,498 portion of the arbitration award that was
used to pay legal fees.
With regard to the accuracy-related penalty applicable to
the $89,246 balance of the arbitration award paid by the Company
in 2001 ($148,744 less $59,498 equals $89,246), petitioners claim
that an enrolled agent advised them in 2001 that the arbitration
award was not includable in their income. Petitioners, however,
failed to call the enrolled agent as a witness. See Hann v.
Venetian Blind Corp., 111 F.2d 455 (9th Cir. 1940); Wichita
Terminal Elevator v. Commissioner, 6 T.C. 1158, 1165 (1946),
affd. 162 F.2d 513 (10th Cir. 1947).
Respondent’s imposition of the section 6662(a) accuracy-
related penalty with respect to the $89,246 portion of the
arbitration award in excess of the 2001 legal fees is sustained.
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