Attorneys' Fees Paid Directly To Employee's Lawyer Were Not Deductible
Biehl v. CIR, 351 F.3d 982 (9th Cir. 2003)
Frank Biehl brought suit against his former employer, North Coast Medical Center, Inc. (NCMI), and won a jury verdict in his wrongful termination action against the company. NCMI agreed to settle the case for $1.2 million, of which $401,000 was paid directly to Biehl's attorney. Biehl reported only $799,000 of the $1.2 million (i.e., his share of the settlement) on his tax return. The IRS issued a notice of deficiency for the portion of the settlement that was paid directly to Biehl's attorney. The Tax Court determined that Biehl could not deduct the attorneys' fees as a miscellaneous itemized deduction because the fees were not "paid or incurred by the employee in connection with the performance of services as an employee" as required by Internal Revenue Code § 62. The Ninth Circuit Court of Appeals affirmed the judgment in favor of the Commissioner.
