Philip T. and Mary Ellen Chaplin - Page 11

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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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