Legal Fees

[dsi]

My research suggests they are not deductible in this situation, but would like some verification from others.

Clients husband passed away in 2007. The mortuary was supposed to cremate his body and return the ashes to my client. The mortuary had another individual with a similar name and his body was supposed to have been buried in the veterans cemetery.

The mortuary cremated the wrong body, and sent my client the ashes of the other individual. When they realized their mistake, the mortuary then placed the body of my client's husband in a casket and buried him in the veterans cemetery. The mortuary would have gotten away with this were it not for an employee who had a conscious and blew the whistle on them.

My client sued for $125,000, and after all attorney fees received only $56,000. Again, I don't see how the attorney fees would be deductible. Anybody see it differently?

[dsi]

Incidentally, one attorney told my client that the legal fees are deductible due to the emotional stress my client suffered.

Another attorney said this is 100% tax free income, not reportable.

[Burke]

Damages specifically granted for emotional distress are considered compensatory, if caused by physical injury or sickness, and are not taxable. Damages granted for emotional distress that is NOT caused by physical injury or sickness ARE taxable. Punitive damages are always taxable. Should have received 1099MISC for punitive damages or other amounts. Any interest received in the award for either type of damages is taxable. She should be able to get something like a letter from her attorney specifying this. See TTB page 3-20. In your client's case, looks like all is taxable, since she did not suffer emotional distress caused by physical injury or sickness, even if the emotional distress caused physical symptoms. See pages 4-26 for deductibility of legal fees.