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.