Up date and a withdrawl of my offer!
Good morning Basset
Thanks for the info - I had already reviewed the IRS document.
Also took a peek at the techguy thread. DON'T CAVE !!!!!
First, you need to amend the statement of facts. Clearly the law is that Payee has to include the award in income - no question about that - it was for emotional distress - no physical injury.
The real question relates to the deductibility of the atty fees paid.
Under the interpretation given by the IRS, it is deductible as an itemized deduction subject to the 2% floor. (T tax attorney's, they understand what this means. The problem arises as a result of the Alternative Minimum Tax.
What happens is that the deduction for attorneys fees becomes taxable under the Alternative Minimum Tax - in essence, Payee is required to recompute her income by adding back certain deductions. One of the deductions she is required to add back are the itemized deductions that are subject to the 2% floor. In reality, this means thatthe tax code requires her to add back the attorneys fees, and to recompute the tax. The result is that, in the Payee's case, the actual tax liability more than doubles.