Frank Biehl Barbara Biehl v. Commissioner of Internal Revenue

Frank and Barbara Biehl (“Biehls”) appeal the decision of the United States Tax Court that the attorneys’ fees paid to their lawyers, pursuant to a settlement agreement with Mr. Biehl’s previous employer, must be treated as a miscellaneous itemized deduction rather than an adjustment to gross income stemming from a reimbursed employee expense under I.R.C. § 62(a)(2)(A). We agree with the Tax Court that the plain language of § 62(a)(2)(A), the regulations explaining that provision, and its legislative history support the conclusion that Congress did not intend for attorneys’ fees of a former employee in a wrongful termination action against his former employer to qualify as having been paid under an employee reimbursement or other expense allowance arrangement.

BACKGROUND

A.

The facts are set forth as stipulated by the parties before the Tax Court. In 1994, the Biehls brought suit against Mr. Biehl’s former employer, North Coast Medical, Inc. (“NCMI”), alleging, inter alia, wrongful termination of Mr. Biehl’s employment. On December 31, 1996, following an unfavorable jury verdict, NCMI agreed to settle the claim for $1.2 million. In an effort to limit their taxable income, the…