§67 — 2-percent floor on miscellaneous itemized deductions

20, 2017), supplementing and overruling in part 147 T.C.

They assert that the Court did not address whether the MCLT was a grantortrust and that the Court "did not overrule the Bankruptcy Court with respect to its finding * * *, the Supreme Court merely said that Petitioner is not a 'grantor' in the classic sense ofthe term." Petitioners are wrong.

§ 67.4 does not apply to section 170(h)(4)(C)(ii) given certain revisions in 2011.

- 8 - [*8] in the IRS examination of the Gregorys’ returns resulted in section 164(a) deductions for CLC tax expenses, which the IRS treated as non-miscellaneous itemized deductions (i.e., not subject to section 67(a)’s 2-percent floor). The remaining CLC expenses were aggregated and permitted as deductions to the extent allowed under section 183(b)(2). Consequently, we decline to address the Gregorys’ motion to the extent it requests the Court to hold that section 67(a) does not apply to sectio

Section 67(b)(9) therefore does not apply .

In contrast, it is respondent’s position that the section 67(e)(1) exception does not apply to the expenses at issue.

Accordingly, we need not decide whether the general rule of sec.

We hold that (1) the deductions at issue are properly deductible by petitioners as unreimbursed employee expenses, reportable on Schedules A, Itemized Deductions, of their Forms 1040, U.S.

Consequently, we hold that petitioners are entitled to deduct $1,295 for charitable contributions for 2010.

Snellman's tax - 14 - home was Indialantic, we hold that petitioners are entitled to a deduction for vehicle expenses of$1,215 (before the 2% floor prescribed in section 67) to account for the cost oftransportation to and from his temporary work location.

We find the law firm's letter to be credible evidence, and therefore we hold that petitioner may deduct the legal fees the law firm reported, subject to the 2-percent limitation that section 67(a) imposes on section 212 expenses .

We hold they do not.

This determination was made pursuant to section 67, which provides that “miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.” Sec.

We hold for respondent that the fee must be treated as a miscellaneous itemized deduction.

§§ 67(b), 63(d)(1), 62. Miscellaneous itemized deductions are allowed only to the extent that, in the aggregate, they exceed 2% of adjusted gross income.5 § 67(a). Taxpayers may deduct vehicle mileage expenses that are substantiated by adequate records or sufficient evidence. §§ 274(d)(4), 280F(d)(4)(A)(i) and (ii). Commuting expenses, however, are generally nondeductible personal expenses, regardless of the distances involved. See Fausner v. Commissioner, 413 U.S. 838, 839 (1973); Commissioner

Specifically, section 67 provides as follows in relevant part: SEC.

Since petitioners claimed the standard deduction for 1992 and have not proved that their total itemized deductions exceeded their claimed standard deduction, the tax preparation fees, if allowable under section 67, would not decrease their taxable income.

By so doing, petitioners avoided the limi- tation imposed by section 67, which allows miscellaneous itemized de- ductions only to the extent they exceed 2% of AGI.

aring heavily against petitioner, who failed to maintain the required records, we find that he is entitled - 42 - [*42] to deductions on Schedules A ofhis 2005-07 returns equal to 33% ofthe claimed investment expenses, subject to the 2% floor under section 67. See sec. 1.67-1T(a)(1)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988). D. Additional Deduction Raised for the First Time on Brief Petitioner contends for the first time on briefthat he is entitled to a deduction for the

In general, expenses deductible under section 212 are treated in the same manner. See secs. 62(a)(2), 63(a), (d), 67(a) and (5), 162(a). Itemized deductions may be limited under section 68 and may have alternative minimum tax implications under section 56(b)(1)(A)(i). See Rosa o v. Commissioner, T.C. Memo. 2010-39. 5(...continued) with he

) SERVED MAR 1 2 2001 - 2 - decision are : (1) Whether petitioners are entitled to deduct legal fees of $84,542 from their adjusted gross income pursuant to section 62(a)(1), or whether petitioners must deduct the legal fees as a miscellaneous itemized deduction under section 67 ; and (2) whether petitioners are liable for an accuracy-related penalty under section 6662(a) .

ductions subject to the 2-percent limitation. In his pretrial memorandum and opening statement at trial, - 6 - respondent contended that these expenses should be disallowed altogether, or if allowed, should be subject to the 2-percent limitation of section 67. Furthermore, petitioner knew that the issue of whether the expenses were properly deductible by him on his individual tax return was before the Court, and he presented evidence on that subject. Therefore, the burden of proof remains with p

temized deductions are limited by certain thresholds and restrictions, whereas deductions used to arrive at adjusted gross income are not. In particular, an itemized deduction in the setting of this case would be subject to the 2-percent floor under sec. 67. - 8 - Respondent relies on section 62 and the related regulations in contending that bad debt deductions in connection with the trade or business of being an employee are treated as itemized deductions. Section 62 provides in part: SEC. 62(a

tion from adjusted gross income. The results from the differing treatments are striking: the taxpayer in Guill enjoyed the full tax benefit of a $151,896 deduction, whereas the taxpayer in Kenseth had his deduction of $91,800 reduced by $5,298 under sec. 67 and phased out to the extent of $4,694 under sec. 68 and was subject to an AMT liability of $17,198 as a result of the disallowance of the miscellaneous itemized deduction for AMT purposes under sec. 56(b)(l)(A)(i). Sec. 62(a)(2)(B) and (C) e

- 10 - because of the section 67 floor on miscellaneous itemized deductions, and (2) petitioners became subject to the alternative minimum tax under section 55.

Respondent recomputed petitioners’ income taxes by subjecting petitioner’s business expense deductions to the 2-percent floor under section 67 and by recomputing petitioners’ alternative minimum tax pursuant to sections 55(a) and 56(b)(1)(A)(i).

rcent of petitioner's adjusted gross income for the appropriate year, made other computational adjustments, and determined the deficiencies here in dispute accordingly. - 4 - OPINION The dispute between the parties centers around the application of section 67. In support of the adjustments reducing the amounts of the deductions attributable to the trust, respondent relies upon section 67(a), which states: SEC. 67(a). General Rule.-- In the case of an individual, the miscellaneous itemized deduct

plus interest, are includable in gross income as determined by R. See O'Gilvie v. United States, 519 U.S. 79 (1996).) R allowed Ps miscellaneous itemized deductions for legal fees and costs attributable to their punitive damages awards pursuant to sec. 67, I.R.C. However, in computing Ps' alternative minimum tax (AMT) adjustments, R disallowed their miscellaneous itemized deductions pursuant to sec. 56(b)(1)(A)(i), I.R.C. 1 Cases of the following petitioners are consolidated herewith: Laurentz

are ordinary and necessary business expenses deductible under section 162. Respondent contends that the legal fees are deductible under section 212(1) as an expense for the production of income and treated as a miscellaneous itemized deduction under section 67. We agree with respondent. Such legal fees are deductible to the extent they exceed 2 percent of petitioners' adjusted gross income. See also sec. 1.67-1T(a)(1)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988). We have co

characterized as business gross receipts. Consistent with that allocation, R determined that $107,596 of the legal fees and costs could be deducted as a Schedule C expense, and the remaining $65,946 was a miscellaneous itemized deduction pursuant to sec. 67, I.R.C. R also set forth an adjustment position which allocated $1 million to salary and wages and nothing to business gross receipts. In accordance therewith, R determined that all legal fees and costs must be taken as miscellaneous itemized

We also hold that they may deduct the portion (50 percent) attributable to claims of Northeast's creditors (other than the bank to which petitioner made the guaranty), subject to the 2-percent limit in section 67, because petitioner's payment to settle claims of Northeast's creditors other than the bank originated in his conduct as an officer or employee of Northeast and in action taken by him as an investor-shareholder of Northeast.

payer's trade or business. If the taxpayer's trade or business is that of being an employee, however, then the legal expenses will be subject to the limitation of section 62(a)(1) and will be treated as a miscellaneous itemized deduction pursuant to section 67. Petitioner's lawsuit against the Postal Service arose from and was related to her prior employment with the Postal Service. Thus, her legal expenses originated from and were related to her trade or business of being an employee. Consequen

Under section 67, in the case of an individual, the miscellaneous itemized deductions for any taxable year are allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income. Section 1.67- 1T(a)(1)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988) provides the deduction under section 67 includ

- 10 - 165(d).9 Wagering losses under section 165(d) are excluded from the definition of miscellaneous itemized deductions for purposes of the 2-percent floor on miscellaneous itemized deductions prescribed by section 67. Sec. 67(b)(3); cf. sec. 68, and see n.4. The Commissioner's determinations in a notice of deficiency are presumed to b

n of the conservation easement; (2) impose a 10% accuracy-related penalty under section 6662(h); (3) allow an additional “other deduction” of $11,268,651; and (4) not subject the “other deduction” increase to the 2% adjusted gross income floor under section 67. On February 6, 2025, respondent filed a Motion for Entry of Decision and a Proposed Stipulated Decision (respondent’s Motion) reflecting the terms of the settlement letter pursuant to Rule 248(b). In accordance with Rule 248(b)(1)(B), res

ther deduction,” (3) to allow an “other deduction” of $11,657,800, (4) to impose a section 6662(h) accuracy-related penalty of only 10% and concede the remaining penalties, and (5) to refrain from imposing the 2% of adjusted gross income floor under section 67 on the allowed “other deduction.” On behalf of Blomquist, Crestlawn agreed with respondent’s proposed settlement of this case by letter dated April 19, 2024.

2054, 2088, amended section 67 by adding subsection (g) suspending miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026.

Actually, for purposes here, the distinction makes no difference, as the expense deductions are treated in the same manner, and it is unnecessary to allocate the deductions to any of the income-generating activities for purposes of section 67 or otherwise.5 Consequently, we proceed as though any otherwise allowable deduction is allowed as an unreimbursed employee business expense, recognizing that petitioner is not an employee of either BMW or Devex.

2054, 2088, amended section 67 by adding subsection (g) suspending miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026.

Treas. Reg. § 1.67- 1T. Also, because Mr. Clemons elected the standard deduction for 2003 through 2005, the amount by which they exceed the 2% floor must also exceed the standard deduction for those years. For 2003 and 2004, Mr. Clemons did not establish the amounts of his investment expenses. He claimed that he incurred amounts

2054, 2088, amended section 67 by suspending miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026.

2054, 2088, amended section 67 by adding subsection (g) suspending miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026.

age interest and taxes, respectively. 3This issue is considered before the application of the 2% of adjusted gross income limitation imposed by sec. 67(a). The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, sec. 11045, 131 Stat. at 2088, amended sec. 67 by suspending miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. - 3 - I. Petitioner’s Background Petitioner is a commercial industrial electrician in the oil and gas industry

f the Helena location but in 2014 was 2This issue is considered before the application of the 2% of adjusted gross income limitation imposed by sec. 67(a). The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, sec. 11045, 131 Stat. at 2088, amended sec. 67 by suspending miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. - 3 - traveling to multiple Vulcan locations in Alabama. Petitioner did not stay overnight in the vicinity of

We leave it to the Rule 155 computations to calculate the deduction (ifany, given the section 67 limitation on miscellaneous itemized deductions) to which petitioners are entitled.

at 2088 (2017), amended section 67 by adding subsection (g), which suspends the miscellaneous itemized deduction for tax years 2018 through 2025.

Subscriptions, Gifts, and Travel Expenses Petitioner testified that she gave gifts ofsubscriptions or wine to her brokerage clients and, occasionally, to a prospective tenant. There were two receipts entered into evidence with either the word "gift" or "gifts" handwritten on them. One has "$150" handwritten on it; the other has an illeg

self-employmenttax liability for any ofthe subject years. Respondent determined that petitioners were liable for self- 46The amounts petitioners deducted for 2004-2006 were net ofthe "2% of AGI" floor on miscellaneous itemized deductions imposed by sec. 67. The amount they deducted for 2003 was computed without that limitation. 47Petitioners do not seek to deduct State and municipal nonresident taxes SSD reported on the one-page schedules related to the 2003 and 2006 Schedules K-1, and we do not

self-employmenttax liability for any ofthe subject years. Respondent determined that petitioners were liable for self- 46The amounts petitioners deducted for 2004-2006 were net ofthe "2% of AGI" floor on miscellaneous itemized deductions imposed by sec. 67. The amount they deducted for 2003 was computed without that limitation. 47Petitioners do not seek to deduct State and municipal nonresident taxes SSD reported on the one-page schedules related to the 2003 and 2006 Schedules K-1, and we do not

oners claimed an "above the line" deduction of$51,500 for moving expenses. On Schedule A, Itemized Deductions, petitioners claimed a deduction of$99,379 for unreimbursed employee business expenses (before the application ofthe 2% floor prescribed in section 67). - 5 - A. Moving Expenses Petitioners attached to their tax return a Form 3903, Moving Expenses, reporting transportation and storage ofhousehold goods expenses of$8,500 and "travel expenses" of$43,000. Mr. Beckey explained at trial that

67.870 (West 2007). Missouri law governs the interpretation and performance ofthe easement, which, per the PLT agreement, "shall be liberally construed to implement Missouri's open areas policy." To ensure National Golf's compliance with the statutory objectives and the PLT agreement terms, PLT agreed to inspect and, if necessary, enforce the

expenses of$40,978.3 In support ofthe latter deduction petitioner attached to his return a Form 2106, Employee Business Expenses, that listed (inter alia) expenses 3 Before diminution by the 2% floor on miscellaneous itemized deductions pursuant to sec. 67. The deduction that petitioner claimed net ofthe 2% floor was $39,637. - 4 - for meals and entertainment of$39,000.4 On the Form 2106 petitioner also represented that he received no reimbursement from his employer that was not reported on his

ness equipment and machines 592 Office copy expenses 492 Business postáge 389 3Petitionerreported negative adjusted gross income; thus, he did not reduce his medical and dental expenses or miscellaneous itemized deductions pursuant to sec. 213(a) or sec. 67, respectively. - 5 - [*5] Business telephone & adver. 2,344 Business reputation legal fees 3,457 Appraisal business education 2,823 Appraisal related interest paid 4,679 Home office 2,912 Business total miles 3,628 × $0.50 1,814 Business insu

reported itemized deductions including medical expenses of$10,006 before the reduction required by section 213(a), charitable contributions of$10,400, and miscellaneous itemized deductions of $16,265 before the application ofthe 2% floor required by section 67. - 6 - Discussion Generally, the Commissioner's determinations in a notice ofdeficiency are presumed correct, and the taxpayerhas the burden ofproving that those determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 1

er on his 2010 Schedule A. The notice is clear that unreimbursed employee expenses were disallowed for lack ofsubstantiation, whereas tax preparation fees were disallowed only because ofthe 2% floor on miscellaneous itemized deductions prescribed by section 67. Petitioner filed a timely petition for redetermination with the Court. - 5 - Discussion I. Burden ofProof The Commissioner's determination ofa taxpayer's liability in a notice of deficiency is normally presumed correct, and the taxpayerbe

1.67- 1T(a)(1)(i), (b), Temporary Income Tax Regs., 53 Fed. Reg. 9875-9876 (Mar. 28, 1988). - 7 - See United States v. Correll, 389 U.S. 299 (1967); Strohmaierv. Commissioner, 113 T.C. 106, 114-116 (1999); see also sec. 1.262-1(b)(5), Income Tax Regs. Respondent's determination disallowing petitioners' meals expenses is sustained.4 2

moved as owners. In short, both sides had an incentive to fulfill the terms ofthe redemption offers after acceptance. The children wanted to "(...continued) damages is an inadequate remedy. See 25 Samuel Williston, A Treatise on the Law ofContracts, sec. 67:1, at 184 (4th ed. 2002) ("Assuming, then, that a valid contract exists and has been broken, the general rule defining the instances where specific performance will be granted may be stated as follows: where damages are an inadequate remedy a

1.67-1T(a)(1)(i), (b), Temporary Income - 30 - [*30] Tax Regs., 53 Fed. Reg. 9875-9876 (Mar. 28, 1988). An employee may also deduct miscellaneous itemized deductions on Schedule A for expenses incurred while looking for a newjob in the employee's current field ofemployment. See Primuth v. Commissioner, 54 T.C. 374, 378-379 (1970); se

The business expenses ofan independent contractor, however, may be deducible from gross income, whereas employee business expenses are deductible from adjusted gross income subject to certain limitations. Li. Certain expenses, such as those for travel, meals, and entertainment, are subject to a higher standard of.proofand must be substanti

67.870 (West 2007).. Missouri law governs.the interpretation and performance ofthe easement, which, per the agreement, shall be liberally construed to implementMissouri's open areas policy. To ensure National Golf's compliance with the statutory objectives and agreementterms, PLT agreed to inspect and, ifnecessary, enforce the easement for an

Section 170(f)(8)(B) provides that the acknowledgment so required must include (i) the amount ofcash and a description (but not value) ofany property other than cash contributed; (ii) whether the donee organization provided any goods or services for the donated property, and (iii) a description and good-faith estimate ofthe value of

Respondent's disallowance ofthe IRA contribution deduction caused computational adjustments to the couple's miscellaneous itemized deductions becaus ofthe deduction's reduction for 2 percent ofAGI under section 67 and cause a computational adjustment to the couple's child tax credit, which under section 24(b) had a limitation hinging on modified AGI.

8.9 For the reasons discussed, petitioner is not liable for the accuracy-relatedpenalties. We leave it to the parties to calculate the allowable employee expense deductions, given the amounts respondent previously allowed and the 2% floor imposed by section 67. To reflect the foregoing, Decision will be entered under Rule 155. 9The amount for 2007 includes: specialized clothing ($840), professional supplies ($95), truck supplies ($1,645), and parking ($300), for a total of$2,880. The amount for

otaling $21,276, including: (1)., Unreimbursed employee business expenses of $9,856;2 (2) charitable contributions of $2,895, consistingsof $1,300 in cash 2Amounts shown as unreimbursed employee business expenses are before the reduction required by sec. 67. - 4 - donations and $1,595 in property donations; and (3) a $6,652 deduction for home mortgage interest. As relevant here, on her 2005 return petitioner claimed an $11,000 moving expense deduction and itemized deductions of $19,177, includin

-3- The $25,981 of itemized deductions reported on Schedule A, Itemized Deductions, were divided into two categories: (1) miscellaneous itemized deductions, which are subject to the 2- percent-of-AGI "floor" of section 67, and (2) all other itemized deductions.

Section 1211(b) provides that an individual taxpayer like Mr.

ules A, Itemized Deductions, for charitable contributions in 2006 and 2007. (Certain of the foregoing adjustments served to increase petitioner's adjusted gross income, thereby increasing the 2-percent floor on miscellaneous itemized deductions, see sec. 67, and hence decreasing the allowable amounts, but this was a purely mechanical matter.) family remains there. Specifically during 2006 and 2007, petitioner's parents lived in the.Kansas City area, along with three of her four siblings and "ton

As a miscellaneous itemized deduction, an employee business bad debt deduction is subject to the 2-percent floor imposed by section 67 and is not deductible in computing alternative minimum tax under section 56(b)(1).

ent interest paid on the Merrill award . Respondent disallowed the legal expenses deducted on Schedule C but allowed a deduction on Schedule A for unreimbursed employee business expenses subject~to the 2 percent of adjusted gros s income floor under section 67 . Petitioners timely filed a petition contesting the deficiency notice . Discussion We must determine whether the legal fees Mr . Purdy paid to successfully sue his former employer are deductible in full as ordinary and necessary business

67-424(1), (2), and (3) (1997) . - 20 - To reflect the foregoing, Decisions will be entered for respondent .

o sec.21.274-5T(a) Temporary Income Tax Regs., 50- Fed. Reg 46014 (Nov. 6, 1985) Finally, we note that:certain-deductions, including unteimbursed employee business sexpenses, are subject to the 2 percent of sadjusted gross÷ income :limitation under section 67 (a) . A. Telephone, Cellular Phonee and Internet Costs Petitioner stated that he maintained a telephone slinesto h s home in ordei- to have Internet access as required by his Internet service provider. However, basic service on-the first te

Respondent disallowed the legal expenses deducted on Schedule C but allowed a deduction on Schedule A for unreimbursed employee business expenses subject to the 2 percent-of adjusted-gross income floor under section 67 .2 Petitioners timely filed a petition contesting the deficiency notice s .

The IRS noted that if this $1,500 was deductible, then it was deductible as a miscellaneous itemized deduction subject to the section 67 limitation, and it was taxable when the amount was returned in 2003 .

health insurer, petitioner testified that the cost of his procedure was disallowed by his insurer because he had not paid the premiums . - 14 - unreimbursed employee expenses are. subject to the 2-percent of adjusted gross income? limitation under section 67_(a) . Petitioner claimed a $118,052 deduction for unreimburse d employee expenses . Petitioner testified that some of the unreimbursed employees;expenses related to his employment with Five-by-Five Networks! and were expenses not paid by Fiv

aw employee whos e j i deductions for those years were reportable on Form 2106, Employee Tf Bus"n"ess Expenses, and Schedule A, Itemized Deductions, subject i ( toy =the{;2-percent limitation imposed on miscellaneous itemize d }' "`deducti'ons under section 67 (a) and (b) ; r , ~~_._~~(2 ) whether petitioner has substantiated claimed employe e business expense deductions in 2004 and 2005 for mileage, depreciation, section 179 expenses, and a repair with respect to his personal vehicle ; and (3)

, the floor imp sed by section 213(a)) ; (4) charitable contributions of $5,000 i cash and $500 in property; and (5) miscellaneous itemizedldeductions of $22,489, which included $55 for safe deposit box rental and $22,434 for job-related expenses, and of which she de~ducted $20,674 (the amount of her expenses exceeding $1,815, the floor imposed by section 67 (a) ) The IRS sent petitioner a letter in May 2005 requesting additional information in order to process her 2003 return .

enses (uniform, union dus, 'edu) 2,656 Other expenses (parking, equip, telephone , closing cost, legal fee, appr)i 6,87 6 ' These miscellaneous deductiion amounts reflect amounts petitioners reported before application of the 2-percent limitation of sec. 67 . .In the notice of deficiency for 2005 the IRS disallowed petitioners' claimed education credit b cause no qualifying educational institution had issued a Form 1098-T, Tuition Statement, to petitioners for 2005 and ecause the IRS had not rec

oor imposed by section 213(a), (2) total cash and noncash gift s to charity of $5,900,3 and (3) total "Job Expenses and Certain Miscellaneous Deductions" (job and other expenses) of $16,824 before the application of the two-percent floor imposed by section 67 (a) . 4 3The total cash and noncash gifts to charity of $5,900 that petitioner claimed in the 2005 Schedule A included $2,100 of claimed noncash gifts to charity . 'Of the total $16,824 of job and other expenses that peti- tioner claimed in

enses (uniform, union dus, 'edu) 2,656 Other expenses (parking, equip, telephone , closing cost, legal fee, appr)i 6,87 6 ' These miscellaneous deductiion amounts reflect amounts petitioners reported before application of the 2-percent limitation of sec. 67 . .In the notice of deficiency for 2005 the IRS disallowed petitioners' claimed education credit b cause no qualifying educational institution had issued a Form 1098-T, Tuition Statement, to petitioners for 2005 and ecause the IRS had not rec

hnson paid his attorney $3,500 from the proceeds of his settlement, the entire $25,000 settlement is recognized as gross income to-Mr . Johnson in 2004 . The Johnsons, however, may deduct the attorney's fees of $3,500 as miscellaneous expenses under section 67 . See Commissioner v . Banks , supra at 432 . By definition; miscellaneous itemized deductions are subject to a 2-percent floor, meaning the Johnsons can deduct these expenses only to the extent that they exceed 2 percent of their adjusted

_ - those expenses are deductible under , section' 212 subject to the 2-, percent floor imposed-by section 67,(a),,and (3),that therefore petitioners should have=reportedthose expenses, in, Schedule-A instead of Schedule C .

2004 . In computing the deficiencies respondent increased the amounts of alternative minimum tax shown on the returns and recomputed the amount of itemized deductions allowable , taking into account the limitations due to adjusted gross income under section 67 . - 3 - After concessions,' the remaining issues for decision are : (1) Whether we may consider petitioner's argument that he is entitled to deduct a current net passive activity loss and prior years' losses for 2003, and if so, whether pe

sted gross income of $116,679 . Petitioner attached to her return a Schedule A . Petitioner claimed total itemized deductions of $44,245, which included unreimbursed employee expenses of $15,059 before diminution by the 2-percent floor prescribed by section 67 . - 3 - In support of her Schedule A deduction for unreimbursed employee expenses , petitioner attached to her return Form 2106, Employee Business Expenses , and reported the following : Vehicle expenses $4,289 Unreimbursed employee expens

the deficiency computation, respondent increased the amount of the alternative minimum tax shown on the return and - 3 - recomputed the amount of itemized deductions allowable, taking into account the limitations due to adjusted gross income under section 67. This case was originally set for trial on May 23, 2005. In anticipation of trial, respondent’s counsel suggested that the parties meet at respondent’s office. The parties met on May 12, 2005. During this meeting, respondent informed petiti

Unreimbursed Employee Business Expenses It is well established that an individual may be in the trade or business of being an employee and that ordinary and necessary expenses incurred in his trade or business are deductible subject to the limitations of section 67 .3 See secs .

e form. Unreimbursed Employee Expenses As previously indicated, petitioner also claimed on Schedule A a deduction for unreimbursed employee expenses consisting of a vehicle expense of $10,348 (prior to diminution by the 2-percent floor prescribed by section 67) . In support of this deduction, petitioner attached to his return a Form 2106, Employee Business Expenses, and reported the following : Business miles driven during 2003 28,744 miles Other miles driven 17,036 miles Total miles driven 45,7

ed the $20,000 deduction to their Schedule A as a miscellaneous itemized expense . If the $20,000 is deductible on petitioners' Schedule C, then it is not subject to the 2-percent floor generally applicable to miscellaneous itemized deductions under section 67 . Deductions are a matter of legislative grace, and taxpayers bear the burden of proving entitlement to the deductions claimed . Rule 142(a) ; INDOPCO. Inc . v . Commissioner, 503 U .S . 79, 84 (1992) ; New Colonial Ice Co . v. Helvering,

nse was incurred in pursuit of a trade or business. Commissioner v. Flowers, supra at 470. 4An employee is allowed to deduct unreimbursed employee expenses as miscellaneous itemized deductions on Schedule A, subject to the 2-percent limitation under sec. 67. 5For a taxpayer to be considered “away from home” within the meaning of sec. 162(a)(2), the taxpayer must be on a trip that requires the taxpayer to stop for sleep or a substantial period of rest. United States v. Correll, 389 U.S. 299 (1967

ritable contributions of $3,549 and a "maintenance fee" of $430 . Petitioner also reported on Schedule A employee business expenses of $3,995 .1 Of that amount, petitioner claimed deductions of $2,892 after taking into account the 2-percent floor of section 67 . In the statutory notice of deficiency, respondent disallowed for lack of substantiation the deductions claimed on Schedule A . On Schedule C, Profit or Loss From Business, petitioner claimed deductions for: (1) Car and truck expenses of

cy. Petitioner also reported, on Schedule A, employee business expenses and other miscellaneous itemized deductions of $33,881. Petitioner claims that he is entitled to deduct $32,938 of that amount, after taking into account the 2-percent floor of section 67. In the statutory notice of deficiency, respondent allowed $12,014.43 of the reported deductions. Respondent determined that the balance of $21,866.57 represented travel, meals, and lodging that petitioner incurred while away from home. Res

imitation on itemized deductions under section 68) is 4 For 1999 and 2000, it is immaterial whether deductions are allowed on Schedules A or C because petitioner’s Schedule A deductions for those years are not subject to reduction pursuant to either sec. 67 (2-percent floor on miscellaneous itemized deductions) or sec. 68 (overall limitation on itemized deductions), nor do they generate alternative minimum tax. - 13 - $24,796 rather than $43,915, which would be the amount if the $19,119 deductio

The deduction would, however, be subject to the 2 -percent floor under section 67 because it does not fall under any of the section 67(b) exclusions .

2000-39, sec. 7.06, 2000-2 C.B. at 346; Rev. Proc. 2001-47, sec. 7.06, 2001-2 C.B. at 339; Rev. Proc. 2002-63, sec. 7.06, 2002-2 C.B. at 699; Rev. Proc. 2003-80, sec. 7.06, 2003-2 C.B. at 1045. Par. (j)(3) of sec. 1.274-5, Income Tax Regs., applies to incidental expenses incurred after Sept. 30, 2002. Sec. 4.03 of Rev. Proc. 200

chedule A or Schedule C. Respondent contends that petitioner, as an employee, must claim the expenses at issue on his Schedule A as miscellaneous itemized deductions and that they are limited to the amount that exceeds the 2-percent floor imposed by section 67. Section 62(a)(1) allows taxpayers to deduct from gross income trade or business expenses “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services

the settlement agreement. See Saigh v. Commissioner, 26 T.C. 171, 177 (1956). Petitioners’ agreement with respondent acted - 46 - “both as a rescission and a discharge by substitution” of their earlier piggyback agreements. 13 Corbin on Contracts, sec. 67.8(6), at 68 (Rev. ed. 2003). At the time of their settlement, the parties had a genuine dispute, which they resolved under conventional contract principles: respondent maintained that petitioners owed deficiencies totaling $7,202, plus addition

the settlement agreement. See Saigh v. Commissioner, 26 T.C. 171, 177 (1956). Petitioners’ agreement with respondent acted - 46 - “both as a rescission and a discharge by substitution” of their earlier piggyback agreements. 13 Corbin on Contracts, sec. 67.8(6), at 68 (Rev. ed. 2003). At the time of their settlement, the parties had a genuine dispute, which they resolved under conventional contract principles: respondent maintained that petitioners owed deficiencies totaling $7,202, plus addition

The Commissioner has ruled that an individual who is a statutory employee under section 3121(d)(3), which relates to employment taxes, is not an employee for purposes of sections 62 and 67, and, therefore, a statutory employee under section 3121(d)(3) is not subject to the section 67(a) 2-percent limitation for expenses incurred by such em

On her 2001 Federal income tax return, petitioner claimed a charitable contribution deduction of $6,197 and a miscellaneous deduction, before the application of section 67, of $5,422.

Respondent concedes that if the Court determines that the Bensons received constructive dividends of $96,749 from ERG’s payment of legal expenses, the Bensons are entitled to deduct legal expenses (subject to the limitations in section 67) of $77,973 for 1989.

Respondent concedes that if the Court determines that the Bensons received constructive dividends of $96,749 from ERG’s payment of legal expenses, the Bensons are entitled to deduct legal expenses (subject to the limitations in section 67) of $77,973 for 1989.

Respondent concedes that if the Court determines that the Bensons received constructive dividends of $96,749 from ERG’s payment of legal expenses, the Bensons are entitled to deduct legal expenses (subject to the limitations in section 67) of $77,973 for 1989.

is identified as the sole proprietor of Morgan Farms. As noted, one of petitioners’ golden retrievers is named Morgan. On this Schedule C, petitioners 1 References to deductions claimed on a Schedule A for any year in issue do not take into account sec. 67. - 6 - reported income of $270 and claimed expenses totaling $8,692, resulting in a net loss of $8,422. All but $200 of the expenses are identified and deducted as “car and truck expenses”. There is also a Schedule A included with petitioners

67; Alexander v. Commissioner, T.C. Memo. 1995-51, affd. 72 - 6 - F.3d 938 (1st Cir. 1995). No deduction is allowed for personal, living, or family expenses. Sec. 262. Section 274(n)(1) limits a deduction for meals and entertainment to 50 percent of the expenses incurred. The percentage limitation may be increased in special circumstances. Se

ation of self- - 9 - employment tax.4 The $13,480 claimed as expenses on petitioner’s Schedule C included $12,301 for home office expenses.5 In the notice of deficiency, respondent determined that the claimed home office expenses were unreimbursed employee business expenses that were allowable as itemized deductions, subject to the limitations of section 67, rather than as deductions related to a trade or business activity.

Penalties Section 6662(a) imposes a 20-percent accuracy-related penalty on the portion of an underpayment of tax which is attributable to a taxpayer's negligence or disregard of rules or regulations. Sec. 6662(b)(1). Section 6664(c)(1) provides that no penalty shall be imposed if it is shown that there was - 12 - reasonable cause

In this case, petitioner contends that her itemized deductions for business expenses are not subject to the limitations imposed by section 67 because, during the year in issue, with respect to the amounts in issue, she was not an “employee” within the meaning of section 62. For purposes of employment taxes, an “employee” includes “any indi

ar 1998, petitioners were entitled to a deduction of $3,525 for automobile (mileage) expenses and tax preparation fees of $235.11, and $3,403 for automobile expenses and $721 for tax preparation fees for 1999, subject to the 2-percent limitation of sec. 67. 3 The Court notes that this case is one of numerous cases heard by the Court involving tax returns prepared by Mr. Beltran, which essentially involve the same deductions at issue here. When the subject returns were called into question by the

k expenses of $10,395 on his Schedule C, resulting in a net loss from business of $5,595. We find that these amounts should be reported on petitioner’s Schedule A, Itemized Deductions, as an unreimbursed job expense subject to the 2-percent floor of section 67. By use of Form 2106, Employee Business Expenses, we recharacterize the correct amount reported on line 20 of petitioner’s Schedule A as follows: Vehicle Expenses $10,395 Less: Reimbursements received from employer 4,800 Net unreimbursed e

h expenses under sec. 274(n)), and (3) cellular telephone and other expenses of $2,913. Petitioner concedes the disallowance of his deduction of $7,376 ($8,000 before taking into account the 2-percent floor on miscellaneous itemized deductions under sec. 67) for legal expenses on his Schedule A, Itemized Deductions. As a result of respondent’s adjustment, petitioner’s itemized deductions were reduced to amounts that totaled less than the standard deduction for 1997. Consequently, petitioner’s ta

Unreimbursed business expenditures of an employee, on the other hand, are typically permitted only as miscellaneous itemized deductions under section 67, to the extent in excess of 2 percent of adjusted gross income, and are reported on Schedules A, Itemized Deductions.

The Commissioner has ruled that an individual who is a statutory employee under section 3121(d)(3), which relates to employment taxes, is not an employee for purposes of sections 62 and 67, and, therefore, a statutory employee under section 3121(d)(3) is not subject to the section 67(a) 2-percent limitation for expenses incurred by such em

has allowed petitioner additional miscellaneous itemized deductions for BAC’s expenses in amounts equal to BAC’s corrected S corporation income in each of the years in dispute (before application of the 2-percent adjusted gross income limitation of sec. 67). Consequently, we do not separately address the parties’ arguments regarding the calculation of BAC’s depreciation deduction under sec. 280F or the ownership of the Cessna that was depreciated by BAC. - 55 - III. BCC Issues Respondent disall

has allowed petitioner additional miscellaneous itemized deductions for BAC’s expenses in amounts equal to BAC’s corrected S corporation income in each of the years in dispute (before application of the 2-percent adjusted gross income limitation of sec. 67). Consequently, we do not separately address the parties’ arguments regarding the calculation of BAC’s depreciation deduction under sec. 280F or the ownership of the Cessna that was depreciated by BAC. - 55 - III. BCC Issues Respondent disall

He also claimed on Schedule A miscellaneous itemized deductions for unreimbursed employee expenses of $39,224, after reduction for the 2-percent floor of section 67.1 From adjusted gross income of $55,207, petitioner deducted total itemized deductions of $44,323, and a personal exemption of $2,750, to arrive at taxable income of $8,134 on which he computed a tax due of $1,219.

hat settlement proceeds of $15,000 received by petitioner were fully includable in gross income and attorney’s fees and costs associated with the litigation were Schedule A miscellaneous itemized deductions, subject to the 2-percent limitation under section 67. Lastly, respondent determined that petitioner is not entitled to deduct payments made to her former husband from the settlement award. Independent Contractor or Employee To determine whether a taxpayer is an independent contractor or an e

- 4 - itemized deductions, and (3) $25,965 in Schedule E expenses. After concessions, the parties agreed that petitioners are entitled to: (1) The $3,000 capital loss, (2) $12,083 in itemized deductions,2 and (3) the $25,965 Schedule E expenses. At trial, the only issue remaining with regard to the notice of deficiency was whether petitio

ross income under section 213(a), $2,175 as a capital loss, $1,500 for moving expenses, $9,512.50 for a Schedule C business loss, and the rounded amount of $6,250 as job and other expenses, before the 2-percent adjusted gross income limitation under section 67. Respondent disallowed for lack of substantiation $6,770 of the medical expenses, $2,175 of capital - 3 - loss, $1,500 of moving expense, and $22,032 of Schedule C items. Respondent allowed petitioner a deduction of $9,646 for employee bus

the reimbursement in gross income. If the employer’s plan is nonaccountable, the regulations provide that the employee’s expenses, if properly substantiated, are allowable as deductions from AGI and subject to various limitations, including those of section 67. Sec. 1.62-2(c)(5), Income Tax Regs. Likewise, if there is no reimbursement arrangement, the employee deductions will be from AGI and not allowable under section 62(a)(2). The parties have stipulated that AES did not have an accountable pl

t Rules of Practice and Procedure. - 3 - deduction and above-the-line treatment of the deduction for her attorney’s fees and costs, which respondent allowed in the notice of deficiency as an itemized deduction subject to the 2-percent limitation of section 67. Some of the facts have been stipulated and are so found. The stipulations of fact and accompanying exhibits are incorporated by this reference. For clarity and convenience, findings of fact and discussion with respect to the validity of re

Under section 67 these itemized deductions are subject to a 2- percent floor. - 9 - Petitioner acknowledges that his employers did not reimburse him for any expense he incurred related to his employment. Thus, his employment-related expenses must be reported on Schedule A. In their petition, petitioners alleged that respondent bears the burden of discre

The parties agreed that petitioners are entitled to deduct the following amounts: (1) $3,263 for taxes, (2) $4,531 for charitable contributions, and (3) $4,289 for unreimbursed employee expenses. We note that petitioners claimed other expenses on their Schedule A in the section entitled “Job Expenses and Most Other Miscellaneous Deductions

Conversely, respondent argues that (1) the amount petitioners paid or incurred as attorney’s fees must be included in petitioners’ gross income and (2) the contingent fee is deductible as a miscellaneous itemized deduction, subject to the 2-percent floor under section 67 and the overall limitation under section 68 and also nondeductible in computing the alternative minimum tax (AMT) under section 56.

mitation for meals and entertainment provided by section 274(n). Petitioner reported $5,712 of miscellaneous itemized deductions for 1994, claiming that he was entitled to deduct $3,377 of that amount after taking into account the 2-percent floor of section 67. Petitioner has no receipts to support the claimed $3,784 deduction. Petitioner used the per diem substantiation method of the applicable revenue procedures and ascertained the amount of that deduction by using the full M&IE rate for each

ley v. Commissioner, 91 T.C. 352, 361 (1988), affd. 972 F.2d 150 (7th Cir. 1992). If a taxpayer's trade or business is that of being an employee, however, then the legal expenses will be treated as an itemized deduction, subject to the limitation of section 67. See McKay v. Commissioner, 102 T.C. 465 (1994), revd. on other grounds 84 F.3d 433 (5th Cir. 1996); Alexander v. Commissioner, T.C. Memo. 1995- 51. The deductibility of legal fees depends on the origin and character of the claim for which

d of rules Mr. Cotton is not entitled to a deduction for 1994 and 1995 as previously indicated. After concessions and our holdings, Mr. Cotton's itemized deductions for 1994 and 1995 do not exceed the standard deduction. See sec. 63(c). As to 1996, sec. 67 imposes a 2-percent floor on miscellaneous itemized deductions. It would appear that the $800 does not exceed the 2- percent floor. - 15 - or regulations. See sec. 6662(a) and (b)(1). "Negligence" consists of any failure to make a reasonable a

4 58 232 Total 268 18,414 In total, petitioner reported $18,714 of miscellaneous itemized deductions for 1996, and he claimed on his 1996 return that he was entitled to deduct $16,956 of that amount after taking into account the 2-percent floor of section 67. Respondent determined that petitioner could not deduct any of the $18,414. OPINION We must decide whether petitioner may deduct the cost of the incidental travel items which he purchased during the subject year while working away from his

- 3 - an exempt organization under section 501 of the internal revenue code. * * * On his return for the year in issue, petitioner claimed a $2,000 deduction for a contribution to an IRA and reported adjusted gross income (AGI) of $37,475. By notice of deficiency, respondent disallowed the entire IRA deduction. Specifically, respondent di

Respondent disallowed $3,546, the total amount of expenses claimed on Thomas' 1993 Schedule C, because Thomas did not establish that the expenses were for an ordinary and necessary business purpose. The notice of deficiency stated that the "expenses are employee business expenses properly deductible as miscellaneous deductions on Schedule

espondent determined that petitioner was an employee, and recharacterized 94.93 percent of petitioner’s Schedule C business expenses, or $62,187, as job- related Schedule A miscellaneous itemized deductions, subject to the 2-percent limitation under section 67. Based upon the adjustments to Schedule A, respondent determined petitioner’s 2 The substantiation of petitioner’s business expense deductions is not at issue in this case. 3 Petitioner arrived at “Statutory Wages”, or $117,391, by applyin

Respondent disallowed $3,546, the total amount of expenses claimed on Thomas' 1993 Schedule C, because Thomas did not establish that the expenses were for an ordinary and necessary business purpose. The notice of deficiency stated that the "expenses are employee business expenses properly deductible as miscellaneous deductions on Schedule

d of rules Mr. Cotton is not entitled to a deduction for 1994 and 1995 as previously indicated. After concessions and our holdings, Mr. Cotton's itemized deductions for 1994 and 1995 do not exceed the standard deduction. See sec. 63(c). As to 1996, sec. 67 imposes a 2-percent floor on miscellaneous itemized deductions. It would appear that the $800 does not exceed the 2- percent floor. - 15 - or regulations. See sec. 6662(a) and (b)(1). "Negligence" consists of any failure to make a reasonable a

that petitioner’s 1993 gross income included the $150,000 award. Respondent also determined that - 5 - petitioner’s legal fees and costs totaling $73,399.25 were deductible as a miscellaneous itemized deduction, subject to the 2-percent floor under section 67. Respondent did not allow the miscellaneous itemized deduction for legal fees in computing petitioner’s alternative minimum taxable income. Thus, under respondent’s determination, petitioner would be subject to alternative minimum tax (AMT)

mitation for meals and entertainment provided by section 274(n). Petitioner reported $5,712 of miscellaneous itemized deductions for 1994, claiming that he was entitled to deduct $3,377 of that amount after taking into account the 2-percent floor of section 67. Petitioner has no receipts to support the claimed $3,784 deduction. Petitioner used the per diem substantiation method of the applicable revenue procedures and ascertained the amount of that deduction by using the full M&IE rate for each

The notice also allowed $91,800 in legal fees as an itemized deduction, reduced by $5,298 for the 2-percent floor on miscellaneous itemized deductions under section 67 and by $4,694 for the overall limitation on itemized deductions under section 68.

petitioner did incur some deductible expenses for acquiring and maintaining his uniforms and, using our judgment, allow a deduction in the amount - 7 - of $380. See Cohan v. Commissioner, supra. However, this amount is subject to the limitations of section 67. Issue 2. Charitable Contributions Petitioner testified that he attends church at least once every week and that he contributed $5 to $10 every Sunday. Petitioner claimed a deduction on his return for $260 for cash gifts that he made to the

that petitioners' 1994 gross income includes the total award of $373,307. Respondent also determined that petitioners' legal fees and costs totaling $221,338 were deductible as a miscellaneous itemized deduction subject to the 2-percent floor under section 67. Petitioners concede that none of the award, legal fees, or costs was attributable to self-employment. Discussion 2Petitioners' allocation to self-employment of legal fees and costs bears the same ratio (as rounded) as petitioners' allocat

e to the taxable portion of the funds received. On audit, respondent determined that the $252,608 relating to attorney's fees constituted taxable income to petitioners and is deductible to petitioners only as a miscellaneous itemized deduction under section 67. OPINION Attorney's fees and costs awarded to prevailing parties in litigation generally are treated as received by the parties, not by. the attorneys, and as items of taxable income to the prevailing parties. See Alexander v. Commissioner

Petitioner contends that his exhibit contains a typographical error and that the amount actually paid was the amount claimed on his return. However, the matter is moot because of the 2-percent floor on miscellaneous itemized deductions prescribed by section 67. Section 67(a) provides that in the case of an individual, miscellaneous itemized deductions are allowable only to the extent that the aggregate of such deductions exceeds 2 percent of the individual's AGI. A deduction for union dues const

a notice of deficiency for 1992. The notice stated that the $149,990 amount was taxable income to them. The notice also stated that petitioners could deduct the $37,841 payment as a miscellaneous itemized deduction subject to the 2-percent floor of section 67. Discussion The instant case requires the Court to revisit the taxability of the proceeds received by a claimant who was a member of the class of plaintiffs in Kraszewski v. State Farm Gen. Ins. Co. In each of our prior cases, we held that

- 5 - must also keep sufficient records to substantiate any deduction that would otherwise be allowed by the Code. Sec. 6001; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). With respect to the $3,000 charitable contribution reported on her 1993 Form 1040, petitioner argues that she is entitled to deduct this amount on accoun

1986. 3. Held, further, P is liable for additions to tax under secs. 6653(a)(1) and 6661(a), I.R.C. 1986. Stuart E. Abrams, for petitioner. Mark A. Ericson, Nancy Chassman Rothbaum, and Rosemarie D. Camacho, for respondent. - 2 - MEMORANDUM FINDINGS OF FACT AND OPINION CHABOT, Judge: Respondent determined deficiencies in Federal in

titioners treat their Tahiti Property as a for-profit - 34 - investment activity and the expenses thereof as deductible under section 212 only from adjusted gross income and subject to the 2- percent floor on miscellaneous itemized deductions under section 67. Petitioners’ proposed revised Federal income tax returns continue to treat petitioners as engaged in a number of separate trades or businesses, specifically a timber farm business, a consulting business, and computer and real estate rental

chedule C of his return. Respondent contends that petitioner, as an employee, must claim the expenses at issue on his Schedule A as miscellaneous itemized deductions and that they are limited to the extent they exceed the 2-percent floor imposed by section 67. “To be reportable on Schedule C, a taxpayer's income must arise from a trade or business, other than that of being an employee. If a taxpayer's earnings arise from working as an employee, they must be reported as wages.” Walker v. Commissi

ude the portion (i.e., $163,308) of the settlement used to pay legal fees. Respondent contends that the legal fees are deductible under section 212(1) as an expense for the production of income and treated as a miscellaneous itemized deduction under section 67. We agree with respondent that the legal fees are deductible to the extent they exceed 2 percent of petitioner's adjusted gross income. See Alexander v. Commissioner, 72 F.3d 938, 946 (1st Cir. 1995), affg. T.C. Memo. 1995-51; see also sec

to that extent. Respondent determined that petitioner incurred the allowable expenses as an employee of UConn. Accordingly, respondent argues that petitioner's allowable work-related expenses are deductible as miscellaneous itemized deductions under section 67. In contrast, petitioners contend that petitioner was in the separate trade or business of writing scholarly materials when he incurred the expenses. In so doing, petitioners argue that petitioner's activities were not related to his emplo

Respondent goes on to argue that if the meal allowances are considered additional employee compensation, and the costs - 7 - petitioner incurred in connection with the program are deductible as employee business expenses, the provisions of section 67 (2- percent floor on miscellaneous itemized deductions) and section 55 (alternative minimum tax) result in the increased deficiency now claimed by respondent.

Unlike the usual situation in employment-status cases, respondent does not contend, even in the alternative, that Hathaway is subject to self-employment taxes. Sec. 1401. Petitioners contend that Hathaway was a statutory employee under section 3121(d)(3)(D) in 1989 and 1990, and thus, by operation of Rev. Rul. 90-93, 1990-2 C.B. 33, petiti

67-8-315(a) provides that in determining the net estate subject to taxes, expenses of administration are to be taken into account. The court further stated: Although T.C.A. § 67-8-315(a) does not define allowable "expense of administration," the general rule is that an executor is entitled to credit his accounts for expenses necessarily and pr

The answer will determine whether his expenses constitute deductible business expenses on Schedule C under section 62(a)(1), or are miscellaneous itemized deductions allowable on Schedule A under section 67 to the extent that they exceed 2 percent of petitioners' adjusted gross income.

Respondent goes on to argue that if the meal allowances are considered additional employee compensation, and the costs petitioner incurred in connection with the program are deductible as employee business expenses, the provisions of section 67 (2-percent floor on miscellaneous itemized deductions) and section 55 (alternative minimum tax) result in the increased deficiency now claimed by respondent.

ly reflecting the following information: Adjusted gross income $48,271 Schedule A--Itemized deductions Taxes $1,861 Home mortgage interest 1,647 Contributions 1,950 Misc. itemized deductions: Unreimbursed employee expenses $13,230 Tax preparation 50 Sec. 67 limit (965) 12,315 Total itemized deductions 17,773 Personal exemptions 6,900 Taxable income 23,598 Income tax liability $4,274 Respondent does not challenge any item of income or the deductions. Rather, respondent determined that petitioner