T.C. Memo. 2007-97

UNITED STATES TAX COURT

SANDRA HOLMES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5699-05. Filed April 24, 2007.

James H. Callwood, for petitioner.

Matthew J. Avon and Paul Schneiderman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Respondent determined a deficiency in and

additions to petitioner’s 2001 Federal income tax as follows:

 Additions to Tax 

Deficiency

Sec.

6651(a)(1)

Sec.

6651(a)(2)

Sec.

6654(a)

$35,380 $2,037 $1,358 $242 
- 2 -

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 2001, and Rule references

are to the Tax Court Rules of Practice and Procedure.

After settlement of some issues by the parties, the issue

for decision is whether petitioner for 2001 is entitled to deduct

legal fees.

FINDINGS OF FACT

At the time the petition was filed, petitioner resided in

New York, New York.

In 1994, using an attorney, petitioner filed in Federal

District Court a lawsuit against petitioner’s employer alleging

sexual harassment and discrimination. In 1996, the District

Court dismissed petitioner’s lawsuit. In 1997 the United States

Court of Appeals for the Second Circuit affirmed the dismissal. 

Holmes v. NBC, GE, 946 F. Supp. 2 (S.D.N.Y. 1996), affd. without

published opinion Holmes v. NBC/GE, 133 F.3d 907 (2d Cir. 1997).

The specific terms of the fee agreement between petitioner

and her attorney are not established in the record.

In 2001, even though petitioner’s Federal sexual harassment

and discrimination lawsuit had been dismissed against petitioner

several years earlier, petitioner’s attorney continued attempts

to recover for petitioner damages relating to alleged sexual

harassment and discrimination. The record does not indicate that 

petitioner ever recovered any amount of damages relating to
- 3 -

sexual harassment or discrimination.

On September 13, 2004, because petitioner had not filed her

2001 individual Federal income tax return, respondent prepared

for petitioner a substitute tax return using third-party return

information and determined against petitioner a tax deficiency of

$35,380, plus the additions to tax listed above. 

On or about September 5, 2006, 2 weeks prior to trial,

petitioner signed and submitted to respondent her 2001 individual

Federal income tax return and claimed thereon a $47,600

miscellaneous legal expense deduction under section 212, subject

to the 2-percent adjusted-gross-income floor of section 67(a). 

At trial, after settling all other issues and without objection

from respondent, petitioner was allowed to raise the issue as to

the claimed $47,600 legal expense deduction.

Of the $47,600 in legal expenses petitioner seeks to deduct,

petitioner acknowledges that in 2001 she paid her attorney no

more than approximately $7,000, representing out-of-pocket legal

expenses. 

Petitioner has not submitted bills, receipts, canceled

checks, or other records that would establish that petitioner

paid any of the legal expenses that petitioner seeks to deduct.

Petitioner admits that she is a cash method taxpayer.
- 4 -

OPINION

A taxpayer is required to keep records to enable a

determination of the taxpayer’s correct Federal income tax

liability to be made. Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.

A taxpayer may deduct from income ordinary and necessary

expenses paid or incurred during a year in connection with the

production of income. Sec. 212.

Under section 1.446-1(c)(1)(i), Income Tax Regs., a taxpayer

who uses the cash method of accounting to compute taxable income

may only deduct expenses in the year the expenses are paid. See

Estate of Gordon v. Commissioner, 47 T.C. 462, 466 (1967);

Dehoney v. Commissioner, T.C. Memo. 2006-108; Sandoval v.

Commissioner, T.C. Memo. 1979-430.

Petitioner’s argument that the statutory language of section

212 allows her a deduction for legal expenses “incurred” but not

paid in 2001 is without merit.

Because petitioner has not substantiated that she paid any

legal fees in 2001, petitioner is not entitled to a deduction in

2001 for legal fees in any amount. 

To reflect the foregoing,

Decision will be entered

under Rule 155.
- 5 -