Legal fees paid in a job-related lawsuit aren’t deductible business expenses, the Tax Court says. After a bank executive was fired, the bank filed suit against her to recover a bonus it had paid her earlier in the year. She then countersued the firm. The parties later settled and dismissed all of their claims against each other, with neither party receiving any money. She deducted attorney fees on Schedule C. Because the lawsuit arose from her status as a former employee, her legal costs are not ordinary and necessary business expenses.
Instead, they’re deductible as a miscellaneous itemized deduction on Schedule A to the extent such itemizations exceed 2% of adjusted gross income. Legal fees paid by plaintiffs in job discrimination cases get an above-the-line deduction.