Timothy E. Kelly, Esq. wrote:
- quote -

Caveat: Maybe, or maybe not. It depends on how much they
base their ruling on state law and differences in attorney's
liens.

There have been situations where AMT kicks in and the
taxpayer actually ends up "in the hole" after being hit with
both the attorney's cut, denied under AMT where it was
forced below the line [AGI], and the AMT itself.

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Drew Edmundson <drewsbeagles[at]hotmail.com> wrote:

- quote -

This will be a very important decision, which will hopefully
finally resolve the split among the circuits regarding the
inclusion of attorney fees in gross income. As most tax
professionals are aware, the inclusion of attorney fees and
their subsequent deduction as a 2% miscellaneous expense
results in a very small amount of any settlement actually
going to the plaintiff in a non-physical injury or
non-physical sickness scenario. What the Sixth Circuit did
in Banks, which apparently finally forced the Certiori issue
was to reject out of hand the state by state analysis of
attorney ownership (or not) in a cause of action. Instead,
the Sixth took the position attorney fees were never
includable in gross income based upon their decisions in
Cotnam and Estate of Clark, which in a general sense
excluded attorney fees on principles apart from the issue of
state law based ownership.

If the Supreme Court sides with the IRS, which I feel is
more likely than not, Congress may finally be forced into
remedial action, to the same degree it was when Solomon was
decided resulting in the favorable post 1998 treatment of
home offices under section 280A.

Timothy E Kelly
Attorney at Law
Certified Specialist
Taxation Law
State Bar of California, Board of Legal Specialization

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- quote -

That's because such is not the case. A former employee who
sues his employer (usually for "wrongful termination" et.
al.) gets an UNREIMBURSED EMPLOYEE BUSINESS EXPENSE for it,
now complete with the 2%-AGI floor shave.

I thought you were addressing a suit that arose from a
sole-proprietorship that was not currently engaged in while
the expense of the suit was incurred when you mentioned
schedule C.

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Stuart O. Bronstein <spamtrap[at]lexregia.com> wrote:

- quote -

Since much litigation seems to drag on forever, I suppose
that just ~might~ meet the "regular and continuous" concept
of a trade or business. <g
But, seriously, I doubt that would fly. If the litigation
arose out of the plaintiff's relationship as an "employee,"
then I think you are stuck with "employee" treatment for tax
purposes (meaning expenses are deducted on Schedule A).

MTW

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- quote -

Agreed. But it's not clear from what you say whether a
former employee who sued his former employer could file a
Schedule C with respect to the litigation. I suppose you
could say that he's in the business of litigating with that
particular defendant.

Stu

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- quote -

You appear to be guessing - i.e. "I think...."

I have researched this before, and found that a FORMER trade
or business that is not currently engaged in CAN have the
same treatment as if it were continuing. Sometimes, due to a
law suit, the sole-proprietorship in the meantime fails, but
that in itself would not be cause to move the deduction from
"above" to "below the [AGI] line."

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- quote -

I think that for the attorneys fees to be deductible on
schedule C the taxpayer would need to be "engaged in a trade
or business". I wouldn't think that the pursuit of one
legal action would create the necessary "continuity" and
"regularity" that is necessary to be engaged in a trade or
business.

It is interesting to note, however, that if the taxpayer
were engaged in a trade or business, then he/she would owe
self-employment tax on the net income.

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- quote -

I think that for the attorneys fees to be deductible on
schedule C the taxpayer would need to be "engaged in a trade
or business". I wouldn't think that the pursuit of one
legal action would create the necessary "continuity" and
"regularity" that is necessary to be engaged in a trade or
business.

It is interesting to note, however, that if the taxpayer
were engaged in a trade or business, then he/she would owe
self-employment tax on the net income.

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Stuart O. Bronstein <spamtrap[at]lexregia.com> wrote:

- quote -

"Yes" for the production of income. But he is not involved
in a "trade or business" (unless he is a "professional"
litigant).

MTW

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Drew Edmundson <drewsbeagles[at]hotmail.com> wrote:

- quote -

I wonder if anyone in that situation ever tried filing a
Schedule C. In prosecuting the suit he's not employed by
anyone, and his actions are for the production of taxable
income.

Stu

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Harlan Lunsford <lunstax[at]bellsouth.net> wrote:
- quote -

Banks is the taxpayer's last name. The court will rule on
whether contingent attorney fees, in this specific case, are
included in the plaintiff's gross income or netted against
the award and only the net included in gross income. Since
under option one the taxpayer deducts the legal fees as
miscellaneous itemized deductions which are a preference for
AMT, the second option is preferable.

The Sixth's case is cited as: 2003-2 USTC 50,675

Drew Edmundson, CPA (NC)

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Drew Edmundson wrote:

- quote -

Which banks? and what are the issues?

Cheer$$,
Harlan Lunsford, EA n LA

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The Supreme Court has agreed to hear the appeal of
Banks v. Commissioner.

Drew Edmundson, CPA (NC)

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