Legal Expenses

[Brian EA]

Taxpayer is a Sgt with the local police force. Last year(2007) he said that he was targeted because of his race.He incurred legal fees of $8000. which was claimed on his 2007. He won the case and in 2008 he is suing the dept. He incurred $10000 in legal fees and would like to claim it on his tax return. I told him that would not be possible because he is not defending himself.
He then called his niece who is an agent with the IRS.She told him that it's a gray area and most likely he can claim the deduction.
Any advice
thanks
brian

[DaveO]

Is he suing to obtain a taxable reward? If so I would say yes. The question might remain that if he loses would he have to recover the tax benefit of the deduction.

[Brian EA]

Is he suing to obtain a taxable reward? If so I would say yes. The question might remain that if he loses would he have to recover the tax benefit of the deduction.

Yes, he is suing to obtain a reward and as he said "to exponge his name from the records"

brian

[dsi]

Since it's a "gray" area, would you not file the disclosure form as well?

[erchess]

TTB 1040 p 3-20

It seems that the award he gets for being discriminated against is taxable which would lead me to the conclusion that his legal fees are deductible whether or not he actually receives the award. I see no need for a Disclosure Form but if the smart cookies here think it is needed, I am inclined to be guided by that.

[taxea]

The original atty fees may not have been deductible in full. His attorney should provide him with a letter detailing which part of the fee was for insuring his income. This is the only portion that would be deductible.
The 2007 return most likely needs to be amended.
If he won the suit and his income was retroactively reimbursed, all of that income is taxable.
As for the award...only the portion of the atty fee to preserve his income would be deductible. Again, he needs a detailed billing from his atty if any of the fee applies. taxea