legal fees paid by ex-employer which issued 1099

See Form 1040 Line 36 instructions. Some fees are now "above the line" (AGI).

However, the 1099-MISC may be inappropriate. The reimbursement should have been issued on the W-2 in the manner of reimbursments under an accountable plan (i.e. not subject to FICA taxes). Assuming you were reimbursed 100% of your fees and had not deducted them in a prior year, you have no income and no deduction, but should attach a statement stating why you are excluding the 1099 from your return. Otherwise, you have a taxable recovery under IRC section 111 and need to include the amount of reimbursement up to the extent of your prior tax benefit for deducting the fees in earlier years.

Mr Stussy is referring to a situation where legal fees for a settlement for discrimination may qualify for an above the line deduciton, no itemizing necessary.

I saw nothing in OP saying this was a Discrimination case, but if it was, the line 36 treatment is appropriate.

The suit was over an overly restrictive noncompete clause. The wages and legal fees were paid after the end of the employment relationship and the legal fees were paid directly to the attorneys.

I may be tilting at windmills here. Everything I've found states that legal fees related to employment go on Schedule A and are subject to the 2% haircut. The only twist I have here is that the fees were paid by the former employer and listed on a 1099.

In my rarely humble opinion, you are NOT tilting at windmills. Any legal expense paid by the former employee is a Schedule A expense subject to the

2% threshold. The court ordered former employer to pay the attorneys, not the former employee. So the former employer sent the 1099 to the wrong person. Looks to me like an error caused by malice of forethought.

Simple answer is to treat it as a 1099 received in error.

Dick - I have about 40% use of my left hand so I must type terse responses,

Yup.

Depending on how the fee agreement is drafted, the payment was probably a debt of the taxpayer/client. Think of it as cancellation of debt income. On the other hand if the fee agreement says the client has no personal liability for the attorney's fees under any circumstances, and if you live in a circuit that says cancellation of non-recourse debt is not taxable, you may have a giid argument.

I have a problem with that, especially if the employee had deducted his legal fees in a prior year, and thus the recovery rule applies.

If he had paid previously, if he had deducted. But if you read what OP actually wrote, he did neither of these things.

All it says is that the [former] employer was ordered to pay fees. That says nothing about whether the employee had paid his counsel or relied on contingency.

In a follow-up post, OP said,

"The wages and legal fees were paid after the end of the employment relationship and the legal fees were paid directly to the attorneys."

The fees would be paid directly to the lawyers only if they had not been previously paid by OP.

Excusez-moi! When I studied Taxation and Business Law for the CPA exam, unsecured, non-recourse debt was NOT income. That was 20+ years ago. Has the tax code changed since then?

My position, without reading the court order, is that this is a malcious 1099 and should be dealt with as you would do with any other inappropriate 1099. Also get a letter from your attorney that the 1099 should have been issued to them.

Dick

My understanding (I have not researched this lately) is that this is not in the tax code, but was based on the decisions of some courts. Section 108 doesn't talk about recourse or non-recourse debt except in one very specialized situation. In some circuits (e.g. 9th where I am) cancellation of non-recourse debt is still not considered to give rise to taxable income.

Excellent advice.