On Mar 21, 3:55�pm, "Kevin" <ke...[at]rocketmail.com> wrote:

- quote -

That is correct.

- quote -

Yes, the $10,000 is taxable.
- quote -

Prorata, you deducted $25,714 for legal fees.

Here is a part of a letter that I received from a respondent in the
IRS Office of Chief Counsel in 1996 and that was published in 1999.

[53] Second, it is true that once a taxpayer has claimed a proper
deduction the taxpayer may not in a subsequent taxable year avoid
having to
include a refund of the deducted item in gross income by amending the
taxpayer's tax return for the taxable year of the deduction. See
Klinghamer
v. Brodrick, 242 F.2d 563 (10th Cir. 1957); Hillsboro National Bank
v.
Commissioner, 460 U.S. 370, 378 fn. 10 (1983).

Here is the key part for you.

However, where on the
original return a taxpayer does not claim an allowable deduction for
state
income taxes that could have produced a tax benefit, section 111(a)
excludes
a refund of the undeducted taxes from gross income. McCabe v.
Commissioner,
T.C. Memo 1983-325; Rev. Rul. 79-315, 1979-2 C.B. 27.


Thus, a taxpayer who
anticipates an adverse effect from a refund of state income taxes may
simply
deduct the correct amount of state income taxes on the taxpayer's
original
return. If it turns out that the refund would not produce an adverse
result
by being included in gross income, the taxpayer may amend the
original
return to claim the entire deduction allowable.

Here is the link to the set of four letters that were published in Tax
Notes Today (Tax Analysts)

http://groups.google.com/group/misc....2a2618a135c649

The rest of the letter from the IRS respondent for the most part was
pure garbage. You seem to have
a pretty good concept of the Tax Benefit Rule so you might want to
read the first letter in the set,
my letter of December 8, 1998. You can read the respondent's letter
of July 27, 1996 (yes, 1996) for
entertainment. The respondent is of the opinion that � 111(a) and 56(b)
(1)(D) of the Interal Revenue
Code provides for, respectively, "DOUBLE OR NOTHING TAXATION" of
itemized deduction recoveries.

Summarizing:

The $10,000 that was in excess of the legal expenses is taxable.

That leaves $50,000 of legal fee that are (would be) deductible.
The $20,000 that you did not deduct in 2007 reduces that $50,000 to
$30,000, the amount that
you deducted in 2006. However, only $25,714 of the $30,000, produced
a "Tax Benefit" in 2006.

Therefore, the $10,000 excess reimbursement for legal fees should be
reported as income, I would report it on Line 21.
The $26,714 would also be reported on Line 21 as an itemized deduction
recovery.

Hope this helps.

Cheers,

WDK

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<removeps-groups[at]yahoo.com> wrote in message
news:3a802fc8-a8ad-479b-8f75-dd93247c2295[at]x29g2000prf.googlegroups.com...
- quote -

The analysis of the court rulings make exactly that point. Remember the
change in the law last year that is effective for 2009 and later?

- quote -

....And "Fair" is a 4-letter word starting with "F". Your point?

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- quote -

More than a bit unfair. I paid full tax on the reimbursement but between
AMT and the 2% burden I doubt I got to deduct anything over the years.

That's why I was so excited by your first answer; but I think it is pretty
hopeless.

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On Mar 22, 3:21 pm, "D. Stussy" <s...[at]bde-arc.ampr.org> wrote:

- quote -

Do you have a citation? If the 60k is a recovery of an an attorney
expense previously deducted on Schedule A, is it still fully taxable,
or only taxable to the amount of the deduction that reduced tax?

The strange thing is that if you deducted 60k of attorney fees but
were in AMT, the deduction got you nothing, so if you have a recovery
of that 60k, the fact that it's fully taxable seems a bit unfair.
Then again, if the company originally paid the 60k on your behalf,
would that amount have been taxable to you?

- quote -

Above doesn't quite make sense to me, but the law and courts don't
always make sense!

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Kevin" <kevin[at]rocketmail.com> wrote
- quote -





Only an employee can become an EX-employee. Therefore the legal expenses
are related to employment.




--
Paul Thomas, CPA
Watkinsville, Georgia

--
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"Paul Thomas" <paulthomascpa[at]bellsouth.net> wrote in message
news:NFfxl.18988$b9.1891[at]bignews6.bellsouth.net...
- quote -

Okay, I reread 525 a bit more carefully:
"Legal expenses. You may be able to deduct attorney fees and court costs
paid in connection with the civil action. Depending on the facts and
circumstances, these expenses are either claimed on Schedule A (Form 1040)
or Form 1040NR (Schedule A), or deducted in figuring the income you report
on Form 1040, line 21, or Form 1040NR, line 21. If the qualified settlement
income was received in connection with your trade or business (other than as
an employee), you can reduce the taxable amount of qualified settlement
income by these expenses. In all other situations, you can only claim these
expenses as a miscellaneous itemized deduction subject to the
2%-of-adjusted-
gross-income limit on Schedule A (Form 1040), line 23, or Form 1040NR
(Schedule A), line 11. For example, an employee or the surviving spouse or
beneficiary of a deceased plaintiff would claim the expenses as a
miscellaneous itemized deduction subject to the 2% limit."

That would rule out legal fees connected to EMPLOYEE income, but how about
severance pay? The income in question was due to being an EX-EMPLOYEE. Had
I been an employee I wouldn't have gotten anything.

Okay, I am reaching; but sometimes reaching works.

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

On Mar 21, 5:42*pm, "Kevin" <ke...[at]rocketmail.com> wrote:
- quote -

Exactly right. So you should not rely on free comments
from who-knows-whom in a public newsgroup to help with
what appears to be a question about a potentially
significant about amount. Ever hear the phrase "you
get what you pay for"?

Ostensibly, you should ask your taxpreparer (account)
to explain his/her reasoning in including the whole of
the amount as income ("related to wages"?!).

Alternatively, you might reasonably prefer to seek the
opinion of one or two other qualified tax specialists.

Just to clarify: the issue is not the complexity of
the tax treatment, but in understanding the facts of
the situation.

People here can only rely on what you tell them, which
is necessarily colored by your expectations and
self-education. In a face-to-face discussion, a live
tax specialist can ask probing questions and look at
the legal documentation of the settlement.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Kevin" <kevin[at]rocketmail.com> wrote in message
news:gq466s$crv$1[at]news.motzarella.org...
- quote -


The courts have ruled differently. You deduct $20k on Schedule A and
include all $60k in income.

- quote -

It's NOT because at the time you incurred the expense, you were entitled to
the reimbursement. In your suit, you didn't have the right to
reimbursement at the time of incurring the expense. Reimbursement was
awarded later by the court decision or settlement.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"D. Stussy" <spam[at]bde-arc.ampr.org> wrote in message
news:gq43ve$3h0$1[at]aux.snarked.org...
- quote -

recovered $60,000. As I read it, I deduct nothing and pay taxes on $40,000.

If I paid $20,000 in medical expenses and received $20,000 in insurance
payments I wouldn't deduct $20,000 (less 7.5% of my AGI) and pay taxes on
the $20,000 insurance would I?
Seems to me it is the same thing.

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"Kevin" <kevin[at]rocketmail.com> wrote in message
news:gq3gjt$v7h$1[at]news.motzarella.org...
- quote -

Wrong, especially if not all events happened in the same year.

- quote -


Just because you didn't deduct (when you were supposed to) doesn't mean
that the amount recovered is excludible in the future year. The ONLY
option you had was to itemize on Schedule A or not (and as these fees
exceeded any possible standard deduction, you should have elected to
itemize).

- quote -

It's all taxable as a recovery.

- quote -

You deducted $30k for 2006.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Paul Thomas" <paulthomascpa[at]bellsouth.net> wrote in message
news:NFfxl.18988$b9.1891[at]bignews6.bellsouth.net...
- quote -

http://www.irs.gov/publications/p525...blink100098400
which seems to be on point.
"A recovery is a return of an amount you deducted or took a credit for in an
earlier year. The most common recoveries are refunds, reimbursements, and
rebates of itemized deductions.
You must include a recovery in your income in the year you receive it up to
the amount by which the deduction or credit you took for the recovered
amount reduced your tax in the earlier year."

It includes an example of someone reimbursed for medical expenses a year
after he deducts the same expense. Since the first 7.5% of AGI cannot be
deducted he only deducted part of the expense; and his reimbursement was
only taxable on the part he deducted. It doesn't explicitly say this, but I
presume that if he had been reimbursed in the same year that he had the
expense, he would have neither a deduction nor an income. (of course, if he
had both they would offset each other)

My situation is more complicated, so I am not sure how much I deducted.
I am also not sure what to do about "reimbursement" for which I didn't even
have an expense.

Or is this section not appropriate?

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"Kevin" <kevin[at]rocketmail.com> wrote
- quote -




I'm not sure that's true. The whole award (wages and legal) might be
considered income to you with the legal expense going to Schedule A. Legal
fees paid to collect income, which the seems to be, are deductible.



--
Paul A. Thomas, CPA
Athens, Georgia

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

In 2007 I settled a lawsuit and was reimbursed $60,000 in legal fees related
to wages. My accountant listed it all as ordinary income, though I now
understand that it is only taxable to the extent I deducted legal fees in
earlier years.

Since I payed $20,000 of the legal fees in 2007 and didn't deduct them, I
should only have paid tax on $40,000 of the reimbursement at most. I think
I have that much straight. There are however two issues I don't understand.

Going through my files, it seems I only actually paid $50,000 in legal fees;
I was
expecting the legal fees associated with the settlement to be higher than
they actually were and the other party was okay with my estimate.
Is that extra $10,000 taxable? It certainly wasn't deducted in earlier
years, but I expect the IRS won't consider it a gift.

In 2006 I had $30,000 in legal fees and $5,000 in investment management
fees. They were only deductable in excess of 2% of my AGI, so I only got to
deduct $30,000 of $35,000.
How much did I deduct for the legal fees in 2006? In the example the IRS
gives in pub525 they reduce the deduction by the amount that wasn't
deducted, but there was only a single deduction in the group; here there are
two.
Do I figure it prorata (I deducted $25,714 in legal and $4,286 in management
fees, for a total of $30,000) or will the IRS insist the whole $30,000 were
legal fees?

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >