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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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