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petitioner’s employment by RHB. As such, respondent determined
that the legal fees were properly deductible as a miscellaneous
itemized deduction to the extent the fees exceeded 2 percent of
petitioners’ adjusted gross income, or $77,180. Because
miscellaneous itemized deductions are not allowable for purposes
of the AMT, petitioners’ legal fees deduction triggered an AMT
liability of $21,082.
In response to the notice of deficiency, petitioners filed
their petition with this Court on May 20, 2005.
OPINION
A. Petitioners’ Legal Fees Deduction
The dispute in this case concerns the appropriate treatment
of the legal fees petitioners incurred in connection with
petitioner’s lawsuit against RHB, Mr. Rice, and Mr. Heard.
Section 62(a)(1) provides that taxpayers are entitled to deduct
from adjusted gross income “The deductions allowed by this
chapter * * * which are attributable to a trade or business
carried on by the taxpayer, if such trade or business does not
consist of the performance of services by the taxpayer as an
employee.” Thus, legal fees may be deducted from adjusted gross
income if the fees are directly related to the taxpayer’s trade
or business. See secs. 62(a)(1), 162. However, if the
taxpayer’s trade or business is that of being an employee, then
the legal fees will be subject to the limitation of section
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Last modified: May 25, 2011