The wife works as an employee doing grant administration for small communities. The company issued her a W-2. In the course of 2014, multiple events went wrong in one of the towns (not her fault). The town demanded $5,000 of her fee back due to the problems or they would sue. She reimbursed the town for these fees out of her savings account in lieu of legal fees to defend the bill. It seems like there should be some deductibility of legal fees here, substance not form. I would like your thoughts.