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in his total expenses.2 The remainder of the total expenses
($84,542) was attributable to legal fees arising from
petitioner’s lawsuit against RHB.
After deducting the business loss from their wages and other
sources of income, petitioners reported adjusted gross income of
$156,763. Petitioners reported that they were not liable for any
alternative minimum tax (AMT). After deducting itemized
deductions and exemptions, petitioners reported total tax of
$23,216 and tax withheld of $46,245 and requested a refund of
$23,028.
On February 22, 2005, respondent issued petitioners a notice
of deficiency, determining a deficiency in petitioners’ 2001
Federal income tax of $24,185 and an accuracy-related penalty
under section 6662(a) of $4,837. Respondent determined that
petitioners were not entitled to deduct legal fees of $84,542
from their adjusted gross income as an ordinary and necessary
business expense. Instead, respondent determined that the legal
fees were an unreimbursed employee expense relating to
2 Even though petitioner had a similar arrangement with RHB
in that he remitted all trustee’s fees to RHB, petitioners did
not report the trustee’s fees and remittances in a similar manner
on their 1994 Federal income tax return. In fact, petitioners
did not report the trustee’s fees as income in any manner and did
not attempt to deduct the remittances. Instead, they reported
only the wages received from RHB as income. Likewise,
petitioners did not report the trustee’s fees received or the
remittances made to Woodstock Corp. from 1995 through 1997.
Petitioners did not begin reporting the trustee’s fees and
remittances on a Schedule C until 1998.
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Last modified: May 25, 2011