Section of Taxation Publications
  VOL. 58
NO. 1
FALL 2004
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Deductibility of Attorneys’ Fees and the Business of Being an Employee: Biehl v. Commissioner
Matthew B. Dubeck


In Biehl v. Commissioner, the Ninth Circuit affirmed the Tax Court’s decision that attorneys’ fees, granted pursuant to a settlement agreement for employment contract claims with the taxpayer’s former employer, are categorized as a miscellaneous itemized deduction and not as an above-the-line adjustment to gross income. As a result, the taxpayer was unable to deduct the attorneys’ fees for the purposes of the alternative minimum tax (AMT) and was assessed taxes that significantly reduced his net recovery. Although the Ninth Circuit correctly resisted the taxpayer’s attempt to strain the meaning of employee reimbursement to include payment of attorneys’ fees, it satisfied itself with an unfair result. Rather than examining attorneys’ fees in the context of their income generation and justification for deductibility, the court addressed the narrow issue of reimbursement in connection with the performance of services as an employee, passing responsibility for a fairer result to Congress.

Part I of this Note provides background on the controversy surrounding the taxation and deduction of attorneys’ fees arising from litigation, including the consequences of the statutory framework and the judicial response. Part II describes the factual basis of Biehl and analyzes the Tax Court’s and Ninth Circuit’s opinions. Part III argues that the Ninth Circuit’s reasoning places the taxpayer in a statutory Hobson’s choice, preventing the deduction of attorneys’ fees and the accurate measurement of income. As a result, the court arrived at a manifestly unfair result and created incoherent law. This Note argues that a reexamination of the “trade or business of being an employee” could provide both an escape from the conundrum and a more reasonable characterization of the transactions. Part IV concludes that, at least in the employment context, the solution offered here would have limited side-effects while providing an equitable and coherent result.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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