Jody Schoolcraft-Burkey - Page 11




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        we could make a rational allocation of MVEDC’s $58,000 payment to             
        compensation for physical harm, if indeed petitioner suffered                 
        physical harm within the meaning of section 104.  Therefore, the              
        entire $85,000 settlement payment is includable in petitioner’s               
        income.                                                                       
             In bringing his lawsuit against MVEDC, petitioner retained an            
        attorney whom he compensated on an hourly basis.  Petitioner made             
        periodic payments to his attorney beginning in 2002, and he paid              
        $11,920 in legal fees during 2003.  At trial, petitioner claimed              
        that his 2003 legal fees were deductible.                                     
             Generally, legal fees are deductible under section 162 only              
        if the matter with respect to which the fees were paid originated             
        in the taxpayer’s trade or business and only if the claim is                  
        sufficiently connected with that trade or business.  See United               
        States v. Gilmore, 372 U.S. 39 (1963); Biehl v. Commissioner, 118             
        T.C. 467, 479 (2002), affd. 351 F.3d 982, 985 (9th Cir. 2003);                
        Test v. Commissioner, T.C. Memo. 2000-362, affd. 49 Fed. Appx. 96             
        (9th Cir. 2002).  Expenses not incurred in a trade or business                
        activity but in the production or collection of income are                    
        deductible as miscellaneous itemized deductions on Schedule A,                
        Itemized Deductions.  Secs. 67(b), 212(1).  Further, it is well               
        established that even though a taxpayer’s employee status may be              

             5(...continued)                                                          
          Commissioner, T.C. Memo. 2004-113, affd. 422 F.3d 684 (8th Cir.             
          2005).                                                                      






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