Just wanted to add a comment to my question regarding deducting legal fees. Their is an IRS memorandum released 8/30/2013 - release number:20133501F.
It further defines "unlawful discrimination". It states:
Attorney’s fees that are included in the recipient’s income may be deductible from gross
income under certain circumstances. Section 62(a)(20) provides for an above-the-line
deduction from gross income for attorney’s fees and court costs, paid by, or on behalf
of, a taxpayer in connection with any action involving a claim of unlawful discrimination.
The term “unlawful discrimination” is defined in § 62(e) as an act that is unlawful under
any of a number of federal, state, or local laws including the ADEA, Title VII, and the
ADA. The deduction under § 62(a)(20) is limited to the amount that is includible in the
taxpayer’s gross income for the taxable year as a result of a settlement or judgment
resulting from the claim. I.R.C. § 62(a)(20). In addition to the statutes enumerated in
§ 62(e)(1) through (17), § 62(e)(18) also provides an above-the-line deduction for
attorney’s fees and costs incurred in an action or proceeding involving any aspect of the
employment relationship.
