Discussion:Legal Fee deduction for discrimination settlement

IRC 62(a)

(20) Costs involving discrimination
       suits, etc.--Any deduction allowable under this chapter 
       for attorney fees and court costs paid by, or on 
       behalf of, the taxpayer in connection with any action 
       involving a claim of unlawful discrimination (as 
       defined in subsection (e)) or a claim of a violation of 
       subchapter III of chapter 37 of title 31, United States Code or 
       a claim made under section 1862(b)(3)(A) of the Social Security
       Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not 
       apply to any deduction in excess of the amount includible in the 
       taxpayer's gross income for the taxable year on account of a 
       judgment or settlement (whether by suit or agreement and whether 
       as lump sum or periodic payments) resulting from such claim.

Schedule A provides "Examples of Expenses You Cannot Deduct" "Legal expenses for personal matters that do not produce taxable income."

pub 525 page 29

The deduction you are claiming cannot be more than the amount of the judgment or settlement you are including in income for the tax year.

My impression is that no income ... no deduction. If I am wrong, I would like to know the reference since I gave someone advice that legal fees for a discrimination case where no settlement was paid were not deductable.

UNLAWFUL DISCRIMINATION CLAIMS LEGAL FEES. You may be able to deduct attorney fees and court costs for actions involving a claim of unlawful discrimination, a claim against the U. S. Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act as an adjustment to income on Form 1040, line 35, rather than as a miscellaneous itemized deduction. See LEGAL EXPENSES under OTHER EXPENSES, later.

LEGAL EXPENSES 
 

You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax.

  You can also deduct legal expenses that are: 
 
    1. Related to either doing or keeping your job, such as those you 
    paid to defend yourself against criminal charges arising out of your 
    trade or business, 
 
    2. For tax advice related to a divorce if the bill specifies how much 
    is for tax advice and it is determined in a reasonable way, or 
 
    3. To collect taxable alimony. 
 
  You can deduct expenses of resolving tax issues relating to profit or 

loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule. You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040). See TAX PREPARATION FEES, earlier.

I am going to email this reply to other poster.

Thanks.

http://www.irs.gov/businesses/page/0,,id%3D7051,00.html#Amt3

Deduction For Attorneys' Fees Generally, individuals, as cash basis taxpayers, may deduct attorneys' fees in the year they are paid, assuming the attorneys' fees otherwise qualify as deductible. In the majority of such cases, the attorneys' fees are paid pursuant to a contingent fee arrangement once damages have been recovered. Where the ultimate recovery is excludable from gross income, either in whole or in part, the payment of contingent attorneys' fees allocable to exempt income are not deductible. IRC section 265(a)(1). The question of the timing and deductibility of attorneys' fees paid prior to resolution of the lawsuit on a noncontingent fee basis requires additional analysis that is not practical to provide in this guide. Examiners should consult with the appropriate Office of Chief Counsel for guidance.

Attorney Fees

Roy,

Would the controlling factors here be "attempting to produce or collect taxable income" and "Related to either doing or keeping your job" even when there has been no settlement?

Technically, I was probably correct on the other post as 1040 line 36 was referenced, but I should have also referenced the miscellaneous deductions, but the language is unclear in instructions for sch A, pub 17 and even Pub 529. I have not researched it further in the IRC's.

Thank you for your response. Excuse my ignorance…When they are referring to the Office of Chief Counsel do they mean my clients lawyer? I guess I would have to contact the IRS for better clarification.

"Examiners should consult with the appropriate Office of Chief Counsel for guidance."

I am writing the Commissioner and the Congress about this matter.

Taxpayers should be entitled to know before hand how how an item is handled for tax purposes. Not some "secret" complex tax position of the General Counsel. Well, at the least the law needs to be clarified in this area, if, it is too complex for an examiner to handle.