Tax Research Memo – Research Paper Example

Tax Research Memo Relevant Facts – Al and Amy have been divorced since many years and Al pays alimony of $ 1000 per month to Amy as per the original divorce decree.
Specific Issues – Amy has sued Al to increase the amount of Alimony. For the purpose, Amy has incurred $ 5000 as legal charges. In order to defend the lawsuit, Al also incurred $ 5000 as legal charges. The point of contention is that if both of them can claim the legal charges incurred as deductible from income tax as per Internal Revenue Code Section 212.
Conclusion – The legal charges incurred by both the contesting parties i.e. Al and Amy falls under the purview of negotiation charges. Negotiation charges are incurred either to increase the alimony or to defend the lawsuit against the claim of increased alimony. The $ 5000 paid by Al is not deductible where as the amount incurred by Amy is deductible under the head of ‘Miscellaneous Deductions’ on Schedule A of the Form 1040 subject to certain limitation.
Reasoning & Support – Though the case of Al and Amy have not yet been decided by the honorable court of law, there have been previous instances that suggest that the legal charges incurred in against of increase in alimony cannot be deductible for income tax.
John McCombe, who had incurred legal expenses to reduce or eliminate payments could not get deduction on tax payable as held by Justice Cardin of the Tax Court of Canada in the year of 1985 (Centa, “Legal Expenses”).
In case of Amy as she has incurred the expenses to increase the alimony, she can claim deduction under the head of ‘Miscellaneous Deductions’ on Schedule A of the Form 1040 allowable up to 2% of her Annual Gross Income for the financial year (Block, “Legal Fees For A Divorce: What Is Or Is Not Deductible”).
Block, J. “Legal Fees For A Divorce: What Is Or Is Not Deductible”. March 29, 2010. Tax Resources. 2000.
Centa, “Legal Expenses”. March 29, 2010. Alimony. No Date.
Harry Browne.Org, “Internal Revenue Code Citations Requiring Payment of Income Tax”. March 29, 2010. Who Must Pay Income Tax? No Date.