IRS allows deduction to AGI for certain tax-related payments.

• Author: Price, Charles E.
• Position: Adjusted gross income

Individuals whose business activities require the preparation of Schedule C, Profit or Loss from Business; Schedule E, Supplemental Income or Loss; and Schedule F, Farm Income and Expenses, for their individual returns, and those that incur expenses to resolve asserted tax deficiencies relative to these activities, have scored a major victory. In Rev. Rul. 92-29, the IRS made it clear that "above the line" deductions for allocated portions of return preparation fees are now permitted, as long as the return preparation bill states clearly a reasonable allocation for these three schedules. The Service also allowed similar treatment for fees paid to resolve asserted tax deficiencies. The ruling does not address the subject of "tax advice" as it relates to sole proprietors, farmers or persons with supplemental income.

Last year the {RS held in Letter Ruling 9126014 that tax advice and return preparation fees relative to Schedules C and E would only be allowed as a miscellaneous itemized deduction pursuant to Sec. 212[3}, subject to the 2% floor.

In the letter ruling, the Service placed a great deal of weight on Temp. Regs. Sees. 1.67- 1T(a)(1)(iii) and 1.62-IT(d). Temp. Regs. Sec. 1.67-IT{a)(2){iii) provides, as an example of a miscellaneous itemized deduction, the "[e]xpense for the determination of any tax for which a deduction is otherwise allowable under section 212(3L such as tax counsel fees .... "But it is not clear whether this example was intended to apply to returns that did not include Schedules C, E and F.

Temp. Regs. Sec. 1.62-IT{d) provides that to be deductible for the purpose of determining adjusted gross income [AGI], expenses must be those directly connected with the conduct of the trade or business. The temporary regulations provide an example of taxes as they relate to rental real estate. State income taxes attributable to the income generated from the property are indirect and would not be deductible "above the line." Property taxes, on the other hand, are direct, and would therefore be deductible "above the line." The above language and examples actually may be traced back to the Senate Finance Committee Report as it relates to the predecessor to Sec. 62 {Section 22[n][l]) [AGI computation). Of greater significance from this Committee Report is the following.

Fundamentally, the deductions thus permitted to be made from gross income in arriving at adjusted gross income are those which are necessary to make as nearly...