Eyefull Incorporated - Page 30

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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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