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persuaded that petitioner’s management would have believed that
current cash-flows would be insufficient to finance the company’s
legal defense obligations to employees and contractors as they
arose.
Hagerman testified regarding concerns she had during TYE
8/31/89 that the company might become involved in protracted
litigation costing several hundred thousand dollars as a result
of liability under the Child Protection and Obscenity Enforcement
Act. We do not believe her testimony establishes a specific and
definite plan to prepare for such a lawsuit. She evidently
possessed no clear idea of how provisions of the act might apply
to petitioner and what challenging it would entail at the time.5
Nor does there appear to have been any reason to plan for
litigation in determining whether to retain or distribute
earnings at the close of TYE 8/31/89--or at the close of any
subsequent taxable year--in light of the reassurances petitioner
received from its attorneys in June 1989 about the Government’s
decision not to pursue enforcement of the act.
5 When asked whether she anticipated a need to hold funds in
reserve when she learned about the act, she replied: “My first
inkling was we may have to fight this if we were somehow cited *
* * because we weren’t complying with something that we knew
nothing about.” “Anything when you fight the United States
Government is going to cost hundreds of thousands of dollars it
seems that way. It goes on and on for years.” There is no
evidence that her thinking on this matter advanced beyond the
initial stage of vague alarm and consternation she described.
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