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were required by the ordinance would be in the neighborhood of
$50,000-$100,000. The basis for her estimate is not clear. Nor
does the record disclose whether these adjustments were made
during the years at issue.
Hagerman foresaw the potential for much greater expenditures
in connection with the Child Protection and Obscenity Enforcement
Act, Federal record keeping and labeling law that took effect in
May 1989. Hagerman seems to have learned about the act from her
attorneys in the first half of 1989. If petitioner was subject
to liability under provisions of the act, a lawsuit challenging
its constitutionality would be very costly. Based on what she
had learned from the experiences of others in the business, she
anticipated a protracted legal battle over several years costing
hundreds of thousands of dollars. By a letter from petitioner’s
attorneys dated June 12, 1989, however, Hagerman was advised that
as a result of a recent District Court decision holding the act
unconstitutional, the U.S. Department of Justice had confirmed
that it would not seek to enforce the act. Petitioner was
involved in no lawsuit concerning the act during the taxable
years at issue, and there is no indication in the record that
petitioner’s management communicated further with counsel on this
subject.
Petitioner’s exposure to liability increased substantially
in TYE 8/31/90, as a result of the cancellation of its workers’
compensation insurance policy. Petitioner attempted to obtain
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