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During 1999, petitioners paid to their attorney, Mark Garay,
$555,429 in legal fees related to the lawsuit (approximately
one-third of the total settlement of $1,786,504).
Petitioners’ 1999 Federal income tax return included a
Schedule C, Profit or Loss From Business. On the Schedule C,
petitioners reported income of $634,634, which included the
$500,000 related to the Crown life policy. Also on Schedule C,
petitioners claimed a deduction for legal expenses of $675,646.
Petitioners reported no alternative minimum tax liability on this
return.
Respondent determined in the notice of deficiency underlying
this case that $500,000 of the income reported on Schedule C was
not related to a trade or business and reclassified that amount
as “Other Income” (not reported on Schedule C). Also, respondent
disallowed $527,004 of the $675,646 of legal expenses because
that portion was not an ordinary and necessary expense incurred
in a trade or business but rather an expense that constituted a
miscellaneous itemized deduction. Based on these changes,
respondent determined that petitioners were now subject to
alternative minimum tax, with the alternative minimum tax due of
$149,246 representing the vast majority of petitioners’ $153,978
deficiency.
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Last modified: November 10, 2007