Court Opinion

ID: 2963830
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:15:50.800984+00
Date Added: 2024-06-11T11:42:47.095025
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USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

          No. 95-1451

                    J. KENNETH ALEXANDER AND JOANNE M. ALEXANDER,

                              Petitioners - Appellants,

                                          v.

                             INTERNAL REVENUE SERVICE OF
                            THE UNITED STATES OF AMERICA,

                                Respondent - Appellee.

                                 ____________________

                             ON APPEAL FROM A DECISION OF
                             THE UNITED STATES TAX COURT

                                 ____________________

                                        Before

                               Torruella, Chief Judge,
                                          ___________

                      Aldrich and Coffin, Senior Circuit Judges.
                                          _____________________

                                _____________________

               Philip J.  Ryan, with  whom Ryan, Martin,  Costello, Leiter,
               _______________             ________________________________
          Steiger & Cass, P.C. was on brief for appellants.
          ____________________
               William  J. Patton,  Attorney,  Tax Division,  Department of
               __________________
          Justice, Loretta C. Argrett,  Assistant Attorney General, Gary R.
                   __________________                               _______
          Allen,  Attorney,  and Richard  Farber,  Attorney, Tax  Division,
          _____                  _______________
          Department of Justice, were on brief for appellee.

                                 ____________________

                                  December 22, 1995
                                 ____________________

                    TORRUELLA,  Chief  Judge.     Respondent-Appellee,  the
                    TORRUELLA,  Chief  Judge
                                ____________

          Commissioner of Internal Revenue (the "Commissioner"), determined

          a deficiency of $57,441 in  the 1989 Federal income tax filed  by

          J.  Kenneth Alexander  (the "Taxpayer")  and Joanne  M. Alexander

          (together, the "Appellants" or the "Petitioners").  The Tax Court

          upheld the Commissioner's  determination and the  Petitioners now

          seek review of that decision.   For the reasons stated  below, we

          affirm.

                                    I.  BACKGROUND
                                    I.  BACKGROUND

                    The pertinent facts, some of which have been stipulated

          and incorporated  in the  district court's  findings, are  not in

          dispute, and are recapitulated here.  Unless otherwise indicated,

          all section references are to the Internal Revenue Code in effect

          for  1989.  Internal Revenue Code, 26  U.S.C.   1 et seq. (1988 &
                                                            ______

          Supp. 1991).

                    In 1983, Taxpayer entered  into an employment agreement

          with  his employer,  W. F.  Young,  Inc. ("Young"),  according to

          which Taxpayer would  remain in the capacities  of Executive Vice

          President,  Treasurer,  and  Chief  Executive  Officer  until  he

          reached  the age  of seventy  (70), on  December 13,  1993.    On

          October 15,  1987, when Taxpayer  was sixty-four (64)  years old,

          Young  terminated  Taxpayer's  employment.    Subsequent  to  his

          termination, Taxpayer offered management consulting  services for

          a fee, and in 1989 obtained a management consulting contract with

          the Hanson Group of Ludlow, Massachusetts.

                                         -2-

                    On February  10, 1988,  Taxpayer filed a  civil lawsuit

          against Young (the "lawsuit"),  in which Taxpayer was represented

          by  the law firm of Ryan & White, P.C. ("Ryan & White").1  In his

          complaint,  Taxpayer  alleged  a   breach  of  the  express  1983

          employment  contract  (or  "Count  I"), a  breach  of  an implied

          pension benefits contract (or "Count II"), and age discrimination

          under Massachusetts  General Law, Chapter 151B,  Section 1 (1976)

          (or "Count III").

                    On May 1,  1989, Taxpayer and Young  executed a written

          settlement agreement (the  "Settlement Agreement"), according  to

          which Young was to  pay Taxpayer $350,000, of which  $100,000 was

          allocated to  Count III, and  $250,000 to Counts  I and II.2   On

          May 5, 1989, as  per the Settlement  Agreement, Young issued  two

          checks  payable  to  "J.  Kenneth  Alexander  and Ryan  &  White,

          Attorneys  for J.  Kenneth  Alexander,"  one  in  the  amount  of

          $100,000  (for Count  III),  and  the  other  in  the  amount  of

          $225,395.20 (for Counts I and II, less taxes withheld).

                    On the  1989 Federal income tax  return, Taxpayer's tax

          preparer   deducted   $245,100  from   the   settlement  proceeds

          attributable to Counts I and II.  This deduction was explained in

                              
          ____________________

          1   J. Kenneth Alexander v.  W. F. Young, Inc.,  Civil Action No.
              ____________________     _________________
          82-243 (Mass. Superior Court, Hampden County 1988). 

          2  The Settlement Agreement also provided that (i) Taxpayer would
          be  deemed to have retired from Young effective October 15, 1987;
          (ii) Taxpayer  would receive  monthly payments commencing  on May
          15, 1989, and  continuing for  the duration  of Taxpayer's  life,
          which total over $70,000  per year; and (iii) Taxpayer  and Young
          executed releases,  according to which  Alexander surrendered all
          claims arising out of his employment and its termination.

                                         -3-

          an  attached statement,  which stated that  Taxpayer paid  Ryan &

          White $258,000 in legal  fees (the "Legal Fee").3  It also stated

          that  according to  Ryan &  White's time  allocations, 5%  of the

          Legal Fee was attributable to settlement of Count III, and 95% to

          settlement of Counts I and II.  Accordingly, $245,100 (95% of the

          $258,000  Legal Fee)  was deducted  from the  settlement proceeds

          attributable to Counts I and II.

                    The   Commissioner   sent   a   notice   of  deficiency

          disallowing Taxpayer's direct deduction of the Legal Fee from the

          settlement  proceeds.    The  Commissioner  determined  that  the

          $250,000 received from Young in settlement of Counts I and II was

          gross  income to Taxpayer, and that the Legal Fee associated with

          Counts   I  and   II  were  miscellaneous   itemized  deductions.

          Accordingly,  the  Commissioner  reduced  the  $245,100 deduction

          reported on the 1989  return to $240,198, due to  the increase in

          Taxpayer's adjusted gross income  and the two percent (2-percent)

          adjusted  gross income  limitation for  miscellaneous deductions.

          In  addition,  the Commissioner  determined  that,  due to  these

          adjustments, Taxpayer was liable  for the Alternative Minimum Tax

          ("AMT")  under  Section  55 of  the  Code,  which  resulted in  a

          deficiency of $57,441.

                    Petitioners filed  a petition in the  United States Tax

          Court for  redetermination  of the  deficiency.   The  Tax  Court

                              
          ____________________

          3  The additional information included  in the statement attached
          to Petitioners' 1989 return, entitled "Disclosure Under Reg. Sec.
          1.6661," is not included here because it is not essential for the
          disposition of the issue on appeal.

                                         -4-

          rejected  Petitioners' arguments,  entering a  final judgment  on

          January 31,  1995, upholding the Commissioner's  determination of

          Petitioners'  tax deficiency.    This appeal  followed.   We have

          jurisdiction pursuant to 26 U.S.C.   7482(a)(1).

                                   II.  DISCUSSION
                                   II.  DISCUSSION

                    The only issue on appeal is the proper tax treatment of

          the  Legal  Fee.    We  must determine  whether  the  Petitioners

          properly  deducted the  Legal  Fee from  the settlement  proceeds

          under Section 1001.   If we find that they did  not, then we must

          determine whether to  treat the Legal Fee as an "above the line"4

          trade or business deduction under Section 162  of the Code, or as

          a miscellaneous itemized deduction "below the line."5

                    On appeal, Petitioners essentially contend that the Tax

          Court's decision  to uphold the Commissioner's deficiency finding

          is caused by the erroneous determination that Taxpayer was in the

          trade  or business of "the performance of services as an employee

          during  1989."   Petitioners correctly  assert that  the defining

          issue is whether Taxpayer was  Young's "employee" for purposes of

          classifying  the  settlement  proceeds  and  for  determining the

          deductibility of the Legal Fee  under Section 62(a)(1).  Although

                              
          ____________________

          4  We make reference to the "line" on the federal income tax form
          where adjusted gross income is calculated.

          5   Petitioners do  not dispute  that by  treating the Legal  Fee
          "below  the line" the amounts involved trigger the AMT and, thus,
          their  tax deficiency.  We recognize that it is this ramification
          which  drives   Petitioners'  challenge  to   the  Commissioner's
          determination   that  the  Legal  Fee  is  to  be  treated  as  a
          miscellaneous itemized deduction.

                                         -5-

          we agree with Petitioners' formulation of the defining issue,  we

          reject their arguments and affirm the court below.

                                A.  Standard of Review
                                A.  Standard of Review

                    We review the  Tax Court's decision "in the same manner

          and to  the same extent  as decisions  of the district  courts in

          civil actions tried  without a jury."  26 U.S.C.    7482(a).  The

          treatment  of the  Legal Fee  is purely  a  question of  law and,

          therefore, subject to  de novo  review.  Estate  of Robertson  v.
                                 _______           ____________________

          Commissioner,  15 F.3d 779, 781  (8th Cir. 1994);  see also First
          ____________                                       ________ _____

          National Bank in Albuquerque v. C.I.R., 921 F.2d 1081, 1086 (10th
          ____________________________    ______

          Cir. 1990) (stating that de novo review is applied to tax court's
                                   _______

          findings  of law and of ultimate fact derived from applying legal

          principles to  subsidiary facts).   The  Tax Court's findings  of

          fact  will only  be  disturbed  for  clear  error.    Manzoli  v.
                                                                _______

          Commissioner,  904  F.2d  101,  103  (1st  Cir.  1990);  U.S.  v.
          ____________                                             ____

          Thompson, 406 F.2d 1006, 1009 (9th Cir. 1969); see also Conner v.
          ________                                       ________ ______

          Commissioner,  847  F.2d  985     (1st  Cir.  1988)  (emphasizing
          ____________

          appropriateness   of  giving   weight  to   Commissioner's  well-

          established views).

                        B.  Characterization of the Legal Fee
                        B.  Characterization of the Legal Fee

                    Petitioners  argue that  the  Legal  Fee  was  properly

          subtracted from  the amount  realized in  the settlement, as  per

          Sections  1001 and 1016,6 in  order to determine  the "gain" from
                              
          ____________________

          6  Section 1001(a) provides, in relevant part, 

                      The   gain  from   the   sale  or   other
                      disposition  of  property  shall  be  the
                      excess of the  amount realized  therefrom

                                         -6-

          the disposition  of Taxpayer's "valuable intangible  assets," the

          express and implied contracts and  resulting lawsuit.  In support

          of their position, Petitioners contend that the Legal Fee was the

          "cost of  the disposition"  of Taxpayer's  assets because it  was

          incurred after Taxpayer's employment was terminated for the "sole
                   _____

          purpose"  of  enhancing  their value  and  disposing  of  them by

          obtaining either  a settlement or judgment.   Petitioners further

          contend  that, because Sections 1001 and 1016 make no distinction

          between  the basis and gain rules for capital or ordinary assets,

          "there  is  a 'capital  account'  for all  assets,  whether those

          assets are  considered capital  or ordinary."   Thus, Petitioners
                              
          ____________________

                      over  the  adjusted  basis   provided  in
                      [S]ection 1011 for determining gain . . .
                      .

          Section 1011(a) provides, in relevant part,

                      The  adjusted  basis for  determining the
                      gain  or  loss  from the  sale  or  other
                      disposition    of   property,    whenever
                      acquired, shall be the  basis (determined
                      under [S]ection 1012 .  . .) adjusted  as
                      provided in [S]ection 1016.

          Section 1012 provides, in relevant part,

                      The basis of  property shall be  the cost
                      of such property . . . .

          Section 1016 provides, in relevant part,

                      (a)  General  rule. Proper  adjustment in
                      respect  of  the  property  shall  in all
                      cases be made

                      (1)  for expenditures,  receipts, losses,
                      or  other  items, properly  chargeable to
                      capital account . . . .

          26 U.S.C.    1001(a), 1011(a), 1012, 1016 (1988 & Supp. 1991).

                                         -7-

          conclude, the Legal Fee is an "expenditure . . . properly charged

          to [the assets']  capital account" within the  meaning of Section

          1016 to be  offset against  the settlement proceeds  in order  to

          determine the "gain" under Section 1001.

                    Upon de  novo review, we  reject Petitioners' arguments
                         ________

          invoking treatment under Section  1001, and their contention that

          the Tax Court erred when it rejected them.

                    In determining the  tax treatment of the Legal  Fee, we

          take as our point of departure Section 61(a), which defines gross

          income as  "all income from whatever source  derived," subject to

          certain exclusions provided in the Code.  It includes, and is not

          limited  to,   "[c]ompensation  for  services,   including  fees,

          commissions, fringe benefits, and  similar items."  See Helvering
                                                              ___ _________

          v. Clifford,  309  U.S. 331,  334 (1940)  (finding that  Congress
             ________

          intended  to exert the "full measure of its taxing power" through

          Section  61(a)).   Next,  we  take into  consideration  the well-

          settled  rule  that the  classification  of  amounts received  in

          settlement  of litigation is to  be determined by  the nature and

          basis of  the action settled, and amounts  received in compromise

          of a  claim must be considered  as having the same  nature as the

          right compromised.  Parker v. United States, 573 F.2d 42, 49, 215
                              ______    _____________

          Ct.Cl.  773 (quoting  Carter's Estate  v. Commissioner,  298 F.2d
                                _______________     ____________

          192,  194 (8th Cir. 1962)),  cert. denied, 439  U.S. 1046 (1978);
                                       ____________

          see  Furrer v. Commissioner, 566 F.2d 1115, 1116 (9th Cir. 1977),
          ___  ______    ____________

          cert. denied, 437  U.S. 903  (1978);  Clark  v. Commissioner,  67
          ____________                          _____     ____________

          T.C.M. (CCH) 3105 (1994).

                                         -8-

                    These two considerations  lead us to  our test: it  "is

          not whether the action was one in tort or contract but rather the

          question to  be  asked is  'In  lieu  of what  were  the  damages

          awarded?'"   Raytheon Production Corp. v.  Commissioner, 144 F.2d
                       _________________________     ____________

          110,  113 (1st Cir.)  (citation omitted), cert.  denied, 323 U.S.
                                                    _____________

          779 (1944); see Getty  v. Commissioner, 913 F.2d 1486,  1490 (9th
                      ___ _____     ____________

          Cir. 1990) (applying Raytheon  test in characterizing  settlement
                               ________

          payment  for  tax  purposes).   An  amount  received  in lieu  of

          compensation  under  an  employment  contract  constitutes  gross

          income to  the recipient  in the year  in which it  was received.

          See  Furrer v. Commissioner, 566  F.2d at 1117  (holding lump sum
          ___  ______    ____________

          payment  for termination  of an  agency relationship  is ordinary

          income);  Heyn v. Commissioner, 39  T.C. 719, 720 (1963) (holding
                    ____    ____________

          amount  received in  consideration of  an employment  contract is

          ordinary income); Clark  v. Commissioner, 67 T.C.M. (CCH) at     
                            _____     ____________                      ___

          (finding  that  lump sum  payment  received  upon termination  of

          employment contract is ordinary income); Rev. Rul. 58-301, 1958-1

          C.B. 23,  24 (holding lump sum payment received by an employee as

          consideration  for the  cancellation  of his  employment contract

          constitutes  gross income to the recipient in the taxable year of

          receipt); cf. Rev. Rul. 80-364, 1980-2 C.B. 294  (illustrating by
                    ___

          way of three  hypothetical examples the income and employment tax

          consequences  of   interest  and   attorney's  fees   awarded  in

          connection with claims for back wages).

                    Under  this  rubric,   whether  Taxpayer's   employment

          contracts are  "property" or "intangible assets"  in the abstract

                                         -9-

          is irrelevant  to the proper analysis of  the characterization of

          the settlement  proceeds and, thus,  the proper tax  treatment of

          the  Legal  Fee.    The  Supreme  Court's  decision  in  Hort  v.
                                                                   ____

          Commissioner, 313 U.S. 28 (1941), is particularly instructive:
          ____________

                      Where,  as  in  this  case,  the disputed
                      amount was essentially  a substitute  for
                      rental  payments which     22(a) [of  the
                      1932  Act]   expressly  characterizes  as
                      gross  income, it  must  be  regarded  as
                      ordinary  income,  and  it is  immaterial
                      that  for  some  purposes   the  contract
                      creating  right to  such payments  may be
                      treated as "property" or "capital."

          Id. at  31.   The cancellation  of the  lease  in Hort  "involved
          ___                                               ____

          nothing  more than  the  relinquishment of  the  right to  future

          rental payments  in return for  a present substitute  payment and

          possession of the leased  premises."  Id. at  32.  Because  those
                                                ___

          future  rents would have been  taxed as ordinary  income had they

          been  received  in  the   ordinary  course  of  the  lease,   the

          "substitute"  payment  should be  treated  no  differently.   Id.
                                                                        ___

          Similarly, here, assuming the  settlement was a "cancellation" of

          Taxpayer's contractual  rights,  what Taxpayer  fought  for,  and

          received, is merely a substitute payment for the compensation and

          retirement  benefits  due  him  under  his  express  and  implied

          employment contracts.  Because his salary and benefits would have

          been taxed  as ordinary  income without  any offsetting basis  if

          received  in  the  ordinary course  under  Taxpayer's  employment

          contract,   the   "substitute"  payments   can   be   treated  no

          differently.   See Henry v. Commissioner, 62 T.C. 605, 606 (1974)
                         ___ _____    ____________

          (holding  that  amounts  received  in  settlement  of  breach  of

                                         -10-

          employment  contract  must  be   held  impressed  with  the  same

          compensatory, taxable  character); cf. Hodge v.  Commissioner, 64
                                             ___ _____     ____________

          T.C.  616 (1975)  (addressing  suit for  back  wages); Sterns  v.
                                                                 ______

          Commissioner, 14 T.C. 420  (1950), affd. per curiam 189  F.2d 259
          ____________                       ____  __________

          (6th Cir. 1951) (same).7

                    Similarly,  Petitioners'  argument  that,  because  the

          settlement was a "cancellation" of his contractual rights, it was

          a  "disposition"  within  the  meaning  of  Section  1001(a),  is
                              
          ____________________

          7   In support of their claim that Taxpayer's express and implied
          contracts were  "intangible assets," Petitioners rely  on a Fifth
          Circuit case  and two  revenue rulings holding  that professional
          football or  baseball player contracts were  assets with distinct
          values that  could be depreciated  by the team owners.   Laird v.
                                                                   _____
          U.S.,  556 F.2d  1224  (5th Cir.  1977) (discussing  professional
          ____
          football player  contracts), cert. denied, 434  U.S. 1014 (1978);
                                       ____________
          Rev. Rul.  77-137, 1971-C.B.  104 (same);  and Rev. Rul.  67-379,
          1967-2  C.B.  127 (same,  baseball).    Petitioners' reliance  is
          clearly inapposite and unpersuasive.  As the Tax Court noted, and
          as Petitioners concede, Taxpayer's employment contract with Young
          was neither a depreciable nor a capital asset in his hands.

             Moreover, while Petitioners correctly maintain that Taxpayer's
          contract  claims were  ordinary, not  capital, assets,  Furrer v.
                                                                  ______
          Commissioner, 566 F.2d  at 1117 (noting that "[i]f  all contracts
          ____________
          granting  rights could  be  considered  capital  assets,  without
          inquiry  into  the  nature  of the  rights  granted,  almost  all
          ordinary  income from  salaries, wages,  or commissions  could be
          transformed  into capital  gain"),  they nonetheless  urge us  to
          apply  here the rationale adopted  in a line  of cases addressing
          the  deductibility of legal fees incurred in the disposition of a
          capital asset.   See United  States v. Hilton  Hotels Corp.,  397
                           ___ ______________    ____________________
          U.S.  580 (1970); Woodward v. Commissioner,  397 U.S. 572 (1970);
                            ________    ____________
          Helgerson  v. United States, 426 F.2d 1293 (8th Cir. 1970); Baier
          _________     _____________                                 _____
          v. Commissioner, 63 T.C. 513 (1975), aff'd, 553 F.2d 117 (3d Cir.
             ____________                      _____
          1976); see also A.E. Staley Manufacturing Co. and Subsidiaries v.
                 ________ ______________________________________________
          Commissioner,  1995 WL 535269 at *46-48, 105 T.C. (CCH) 14 (1995)
          ____________
          (providing  a  recent discussion  of  the "origin  of  the claim"
          analysis in the context  of capital assets).  These  cases simply
          do not persuade  us that  Taxpayer's Legal Fee  should be  offset
          against  the  settlement proceeds  because,  as  we have  already
          explained, Taxpayer's Legal Fee was incurred to obtain damages in
          the  nature of compensation due him under the express and implied
          employment contracts. 

                                         -11-

          unpersuasive.   As  the Tax Court  correctly noted,  assuming the

          settlement was a "cancellation" of Taxpayer's rights, it does not

          necessarily   follow   that    the   settlement   constituted   a

          "disposition"  of "property" warranting  an offsetting  of basis.

          See Herbert's Estate v. Commissioner, 139 F.2d 756 (3d Cir. 1943)
          ___ ________________    ____________

          (discussing meaning  of "disposition" and  holding extinguishment

          of decedent's debt, represented by readily transferable notes and

          open accounts,  was a  disposition), cert. denied,  322 U.S.  752
                                               ____________

          (1944).8   More  importantly, to  permit Taxpayer  to offset  his

          "cost of  disposition" or  basis --  the Legal  Fee  -- would  be

          fundamentally inapposite  in light  of the controlling  fact that

          the settlement proceeds are clearly in the nature of compensation

          as Young's employee.9  

                    To recapitulate, what is relevant  is that, as the  Tax

          Court found, Taxpayer in substance was suing for damages suffered

          by  the  loss  of  his  employment with  Young  --  his  loss  of

          compensation in terms of salary and retirement benefits.  This is

                              
          ____________________

          8  As  the Tax  Court correctly noted,  Petitioners' reliance  on
          Herbert's Estate  is inapposite.   Petitioners fail  to recognize
          ________________
          that  the nature of the claim involved proved an important factor
          in  the court's finding of a "disposition."  Unlike the executors
          in  Herbert's Estate, Taxpayer did not hold a claim against Young
              ________________
          in  the sense  of  a "debt,"  that  was readily  transferable  or
          liquidated  prior to settlement; nor,  was he in  any way Young's
          "creditor." 

          9  One might intuitively  argue that some sort of  "basis" should
          be  recognized  when one  has to  litigate  to receive  one's due
          compensation.   The fact remains,  however, that the  Code simply
          does  not  provide   for  the   offsetting  of   basis  in   such
          circumstances except  in limited cases involving  capital assets.
          Instead,  the Code permits  litigation expenses to  be taken into
          account by way of a deduction.  See Section C, infra.  
                                          ___            _____

                                         -12-

          a factual determination and, indeed, is one with respect to which

          we  find no clear error.   In fact, the claim  giving rise to the

          Legal  Fee is  inexorably  rooted in  Taxpayer's employment  with

          Young  --   indeed,  in  his  status   as  Young's  "employee."10

          Because  the   damages  Taxpayer  received   are  essentially   a

          substitute  for the  salary and  benefits he would  have received

          under  the  employment  contract,  they  are  fully  included  as

          ordinary  income in  Taxpayer's  gross income  under Section  61,

          without  regard   to  whether  Taxpayer's   employment  contracts

          constituted "property" or "intangible assets."  Hort, 313 U.S. at
                                                          ____

          31-32.11

                    Thus, upon de  novo review, we find no  error of law in
                               ________

          the  Tax Court's rejection of  Petitioners' arguments in favor of

          Section  1001  treatment,  because the  settlement  proceeds were

                              
          ____________________

          10  We note also that under this  rubric it is irrelevant that at
          the  time of  the  lawsuit, Taxpayer  was  no longer  on  Young's
          payroll.   See  footnote 14,  supra, and  related text.   Equally
                     ___                _____
          irrelevant is  Taxpayer's stated purpose for  incurring the Legal
          Fee, namely "to add value to [Taxpayer's] contract claims, and to
          dispose  of those assets  by means  of either  a settlement  or a
          courtroom  victory."   See  Woodward, 397 U.S.  at 578 (rejecting
                                 ___  ________
          purpose  test  and noting  that it  would  encourage a  resort to
          formalisms  and artificial  distinctions); U.S.  v.  Gilmore, 372
                                                     ____      _______
          U.S. 39, 49 (1963) (rejecting purpose  test in favor of origin of
          claim test).  Taxpayer's desire to obtain the salary and benefits
          due under  the employment contracts  was clearly the  "origin" of
          the  lawsuit - not his alleged desire to "dispose" of "intangible
          assets."  

          11  We note that  we need not address the merits  of Petitioners'
          claim regarding Sections 1001 and 1016, namely that because those
          two sections make no distinction between the basis and gain rules
          for capital or ordinary assets, "there is a 'capital account' for
          all assets." 

                                         -13-

          received in lieu of compensation and, as such, are fully included

          as gross income under Section 61.

                          C.  Deductibility of the Legal Fee
                          C.  Deductibility of the Legal Fee

                    Having  determined that  the Legal  Fee is  included in

          gross income  under Section 61,  we turn  to the question  of its

          deductibility.   It is well-settled that any accessions to wealth

          received by a taxpayer  are included in his gross  income, unless

          the  taxpayer  can demonstrate  that  the  amount received  falls

          within a specific statutory  exclusion.  Commissioner v. Glenshaw
                                                   ____________    ________

          Glass,  348 U.S.  426, 431,  reh'g denied,  349 U.S.  925 (1955).
          _____                        ____________

          Section  162(a)  provides  that  there "shall  be  allowed  as  a

          deduction  all  the  ordinary  and  necessary  expenses  paid  or

          incurred  during the  taxable year  in carrying  on any  trade or

          business."   Section 62(a)(1)  adds that expenses  falling within

          Section  162(a)  are  deducted from  gross  income  to  arrive at

          "adjusted gross income,"  explicitly excluding expenses  incurred
                                               _________

          by a taxpayer engaged in the trade or business of the performance

          of services as an employee.12

                    Petitioners   argue  that,  if  the  entire  settlement

          proceeds  allocable to Counts I and II constitute gross income to
                              
          ____________________

          12  Section 62(a)(1) provides in pertinent part, 

                      The  deductions  allowed by  this chapter
                      (other  than   by   part  VII   of   this
                      subchapter) 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 by the taxpayer as an employee. 
                      _______________________________________

          26 U.S.C. Section 62(a)(1) (1988 & Supp. 1991) (emphasis added).

                                         -14-

          him under  Section 61(a)  of the Code,  the Legal  Fee should  be

          treated  as an "above the  line" trade or  business expense under

          Section 162(a) of the Code, rather than a "miscellaneous itemized

          deduction" under Section  63, as the  Commissioner found and  the

          Tax Court  held.  The crux  of Petitioners' argument is  that the

          "employee" limitations of Section  62(a)(1) do not apply, because

          Taxpayer was not Young's  employee during 1989.  Pointing  to the

          fact that  Taxpayer  was  employed  in  1989  as  an  independent

          management  consultant,  they  maintain   that  the  Tax  Court's

          application of Section 62(a)(1) is based on its erroneous finding

          that Taxpayer was "in  the business of performing services  of an

          employee" during 1989.

                    We disagree with Petitioners.  First, we reiterate that

          we find no clear  error in the Tax Court's  determination finding

          that Taxpayer was "in  the business of performing services  of an

          employee" during 1989.13   Second, we look to the  plain language

          of  Section 62(a)(1).    As the  Tax  Court correctly  noted,  no

          distinction  is  made in  Section  62(a)(1)  between present  and

          former  employees  if the  expenses  originated in  the  trade or

          business  of being an employee.14   Thus, the  fact that Taxpayer
                              
          ____________________

          13  It is well-settled that an individual may engage in the trade
          or  business  of rendering  services as  an  employee.   McKay v.
                                                                   _____
          Commissioner, 102 T.C. 465, 489  (1994), appeal docketed, No. 94-
          ____________                             _______________
          41189 (5th Cir. 1995) (collecting cases). 

          14  See  McKay, 102  T.C. at 489  (holding corporate  executive's
              ___  _____
          post-employment  litigation  expenses  incurred  in  suit against
          former  employer  were incurred  in trade  or business,  and were
          deductible, if  at all, under  Section 162);  McKeague v.  United
                                                        ________     ______
          States,  12 Cl. Ct. 671, 674-77 (1987) (finding, inter alia, that
          ______                                           __________
          former employee's  litigation expenses which originated  in trade

                                         -15-

          was not in actuality Young's employee in 1989 does not alter  the

          controlling  fact that  the  lawsuit and  the ensuing  settlement

          directly resulted  from his  employment with Young.   Petitioners

          argue  in vain that Taxpayer should not be "saddled with employee

          status" because  his  new trade  or  business as  an  independent

          management   consultant  indicates  a  "break"  from  his  former

          employment with Young  (Appellants' Brief,  p. 40).   Equally  in

          vain, they argue  that the "[l]awsuit should be looked  at as the

          ordinary  and  necessary  expense   incurred  by  an  independent

          businessman  to  bring   suit  when   contracts  are   breached."

          (Appellants'  Brief, p. 40).   As the Tax  Court correctly found,

          there is absolutely no  connection between Taxpayer's lawsuit and

          his  independent  management   consulting  business.     Instead,

          Taxpayer's  lawsuit  was  "directly  connected  with,  or .  .  .

          proximately   resulted   from"   his   employment   at   Young.15

          Kornhauser,  276 U.S.  at  153.   It is  under  this rubric  that
          __________

                              
          ____________________

          or business  were deductible  as ordinary expenses  under Section
          162), aff'd without published opinion,  852 F.2d 1294 (Fed.  Cir.
                _______________________________
          1988);  cf. Kornhauser v. United States, 276 U.S. 145, 153 (1928)
                  ___ __________    _____________
          (stating that where suit against a taxpayer is directly connected
          with,   or  proximately  resulted  from,  his  business,  expense
          incurred is a business expense).

          15  We note also that on the "Disclosure Under Reg. Sec. 1.6661,"
          Petitioners' tax preparer describes  the lawsuit against Young as
          being  for   "age  discrimination,  back   wages  and  retirement
          benefits." (Appellants' Appendix, p. 68).  We also note that  the
          releases executed  pursuant to  the  Settlement Agreement  regard
          "[a]ll claims  arising out of [Taxpayer's]  employment by [Young]
          and the  cessation of [Taxpayer's] employment"  and "[a]ll claims
          which  were  or could  have been  asserted  by [Taxpayer]  in the
          Lawsuit  entitled  J.  Kenneth  Alexander v.  W.F.  Young,  Inc.,
                             ______________________     __________________
          Hampden  Superior Court  Civil  Action No.  88-243." (Appellants'
          Appendix, p. 98).

                                         -16-

          Taxpayer is considered  to be  in the business  of being  Young's

          "employee" for  purposes of  falling within the  Section 62(a)(1)

          limitation.16

                    In another  attempt  to circumvent  the application  of

          Section  62(a)(1),  Petitioners  argue  that,  if  we   attribute

          employee status to Taxpayer,  we should find that Young's  direct

          payment of the settlement proceeds to R&W (by way of joint checks

          payable  to  Taxpayer and  R&W as  joint  payees) qualifies  as a

          reimbursement   arrangement  within   the   meaning  of   Section

          62(a)(2)(A).    That section  provides  that  reimbursed employee

          expenses  are permitted  to be  deducted from  gross income  when

          arriving at  adjusted gross  income.17  Petitioners  contend that

                              
          ____________________

          16  Similarly irrelevant is Petitioners' argument  that the Legal
          Fee was not expended for the benefit of Young's business  and was
          in  fact detrimental to Young.  See McKay, 102  T.C. at 488, n.23
                                          ___ _____
          (noting that  "[i]t  makes no difference whether the  employee is
          defending himself in actions  that challenge his activities  as a
          corporate  officer or the employee is bringing a suit against his
          former  employer."); see also McKeague, 12 Cl. Ct. 671 (involving
                               ________ ________
          litigation  expenses  which  were  not incurred  for  benefit  of
          taxpayer's employer). 

          17   Section 62(a)(2)(A)  provides,  in pertinent  part, that  in
          determining adjusted gross income there will be allowed,

                      [t]he  deductions  allowed  by   part  VI
                      (section 161 and following) which consist
                      of  expenses  paid  or  incurred  by  the
                      taxpayer,   in    connection   with   the
                      performance  by  him  of services  as  an
                      employee, under a reimbursement  or other
                                _______________________________
                      expense  allowance  arrangement with  his
                      _________________________________________
                      employer.        The   fact    that   the
                      ________
                      reimbursement may be provided by  a third
                      party  shall  not  be   determinative  of
                      whether  or  not  the preceding  sentence
                      applies.

                                         -17-

          Young's direct payment arrangement  was effectively providing for

          the payment of the  Legal Fee pursuant to Section  62(a)(2)(A) in

          light  of  the  fact   that  R&W  had  a  statutory   lien  under

          Massachusetts  law for the payment  of the Legal  Fee.  See Mass.
                                                                  ___

          Gen. L.  ch. 221, sec. 50 (1986).  This argument fails because it

          is  utterly without  support  in the  record.   As the  Tax Court

          correctly found,  Petitioners have  not proven that  Taxpayer was

          under a  "reimbursement or  other expense  allowance arrangement"

          with  Young for  Taxpayer's Legal  Fee. Contrary  to Petitioners'

          insistence,  the fact  that the record  shows Young's  direct and

          joint payment is  "standard operating procedure" in  all types of

          litigation  does   not  support   the  requisite  finding   of  a

          reimbursement or other  "arrangement" or alter the fact that both

          Young and  Taxpayer were  responsible for their  respective legal

          costs.   Finally,  we  also note  that  the settlement  agreement

          itself makes no  mention of  attorney's fees  and the  Taxpayer's

          lawsuit  was  dismissed "without  prejudice  and  without costs."

          Thus,  we reject Petitioners'  argument that  Section 62(a)(2)(A)

          applies,  and reaffirm  our conclusion that  the Legal  Fee falls

          squarely within Section 62(a)(1).

                    Having determined that Section 62's employee limitation

          applies, we turn to its effect on Taxpayer's Legal Fee.  Expenses

                              
          ____________________

          26 U.S.C.    62 (1988  & Supp. 1991)  (emphasis added); see  H.R.
                                                                  ___
          Conf.  Rep.  No. 998,  100th Cong.,  2d  Sess. at  204. (allowing
          reimbursed expenses only if  incurred pursuant to a reimbursement
          or  other  expense   allowance  arrangement  requiring  employees
          substantiate expenses covered thereunder to the person  providing
          the reimbursement).

                                         -18-

          excluded  under the  Section 62(a)(1)  limitation are  treated as

          "itemized  deductions"  under  Section  63, such  that  they  are

          subtracted from adjusted gross income in computing the taxpayer's

          "taxable income."   See  I.R.C.    63(d) (stating that  "itemized
                              ___

          deductions" include all deductions  not "allowable in arriving at

          adjusted gross income" and  the deduction for personal exemptions

          provided  by  Section  151).    In   turn,  under  Section  67(b)

          "miscellaneous itemized  deductions" -- which are  defined as all

          itemized  deductions  other  than those  specifically  enumerated

          therein -- are subject to a  2-percent floor, such that they  are

          allowable  "only  to  the  extent  that  the  aggregate  of  such

          deductions exceeds 2 percent of adjusted gross income."   Because

          trade  or business expenses subject  to Section 62(a)(1), such as

          Taxpayer's Legal  Fee,  are not  among the  deductions listed  in

          Section  67(b), statutory  construction leads  to the  conclusion

          that they are miscellaneous itemized deductions subject to the 2-

          percent floor.   See McKay, 102  T.C. at 493;18 cf.  In Re Black,
                           ___ _____                      ___  ___________

          131 B.R. 106, 108 (E.D.  Ark. 1991) (discussing the deductibility

          of non-reimbursed employee business expenses).

                    Upon  de   novo  review,   and  finding  no   merit  to
                          _________

          Petitioners' other arguments, we therefore affirm the Tax Court's

          determination that the  Legal Fee is properly deducted "below the

          line."
                              
          ____________________

          18   We note  that, without  advancing much  by way  of argument,
          Petitioners  urge  us  not to  follow  McKay  (and its  statutory
                                                 _____
          analysis),  claiming that it is  wrongly decided.   We merely add
          that,  upon  de novo  review,  we  agree  with McKay's  statutory
                       _______                           _____
          analysis, and find the case on point. 

                                         -19-

                     D.  Applicability of Alternative Minimum Tax
                     D.  Applicability of Alternative Minimum Tax

                    Petitioners  do  not  dispute  that  the  treatment  of

          Taxpayer's  Legal  Fee  as  a  miscellaneous  itemized  deduction

          triggers  the application  of  the Alternative  Minimum Tax  (the

          "AMT") under Sections  55 and 56;19 nor do they  deny that, under

          Section  56(b)(1)(A)(i), they  are  not permitted  to deduct  the

          Legal Fee as  a miscellaneous itemized  deduction (as defined  in

          Section 67(b))  in  computing the  AMT.   Petitioners  do  argue,

          however, that  the Commissioner's "stretching"  interpretation of

          Section  62(a)(1), adopted by the Tax Court and, now, this Court,

          results in "gross  injustice, inequity and lack  of uniformity in

          the  treatment of  taxpayers  similarly situated."   (Appellants'

          Brief, p. 24).

                    We recognize that, because the amounts involved trigger

          the AMT and, thus,  Taxpayer's deficiency, the outcome smacks  of

          injustice because  Taxpayer is effectively robbed  of any benefit

          of the Legal Fee's  below the line treatment.   While unfortunate

          for Petitioners  here, we  disagree that  there is  inequality of

          treatment as compared to  similarly situated taxpayers.  Although

          it  may seem  otherwise,  in reality  Petitioners  have not  been

          denied their below the line deduction of the Legal Fee.

                    The AMT was  enacted to "ensure  that no taxpayer  with

          substantial economic  income can avoid significant  tax liability

          by  using exclusions, deductions, and credits."  S. Rep. No. 313,

          99th Cong.,  2d Sess. at 518,  1986-3 C.B. (Vol. 3)  v., 518; see
                                                                        ___
                              
          ____________________

          19  26 U.S.C.    55 and 56 (1988 & Supp. 1991).

                                         -20-

          also S. Rep. No. 1263, 95th Cong., 2d Sess., 1978-1 C.B. (Vol. 1)
          ____

          315, 499. It is well  established that equitable arguments cannot

          overcome  the  plain  meaning  of  the  statute.    See  Okin  v.
                                                              ___  ____

          Commissioner, 808 F.2d 1338,  1340-42 (discussing the purpose and
          ____________

          constitutionality of the AMT), cert. denied, 484 U.S. 802 (1987);
                                         ____________

          Warfield  v. Commissioner,  84  T.C. 179,  184 (1985)  (rejecting
          ________     ____________

          argument that imposition  of the AMT  was unfair because  income-

          producing  transaction was only a "one-time deal;" "[t]here is no

          justification  for  creating such  an  exception  to the  express

          terms"  of Section 55); see also Rawlins v. Commissioner, 1995 WL
                                  ________ _______    ____________

          610605,  at *5-8, 70 T.C.M. (CCH) 1046, ____ (1995).  Petitioners

          are  bound  by  the tax  consequences  of  the  settlement as  it

          actually occurred.  Id. at 184.
                              __

                                   III.  CONCLUSION
                                   III.  CONCLUSION

                    For the  foregoing reasons,  we affirm the  Tax Court's

          decision and  uphold the  Commissioner's finding  of Petitioners'

          deficiency.   The judgment of the Tax Court is affirmed.
                                                         affirmed.
                                                         ________

                                         -21-