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Silbernagel stated: "I must insist that you continue with the
reduced consulting fees as called for in our agreement or I will be
required to take the necessary action to enforce the agreement."
Despite the comments in his letter to Leste, Silbernagel did not
pursue legal action to enforce the consulting agreement, nor did he
receive any additional consulting fees from FAMC.
FAMC issued Forms 1099 to Silbernagel for the calendar years
1989, 1990, and 1991 in the respective amounts of $135,000,
$110,000, and $65,000. Silbernagel indicated at trial that he
reported these amounts as ordinary income from consulting services
on his Federal income tax returns for the respective years.3
On its Federal income tax returns for its fiscal years ended
October 31, 1989, 1990, and 1991, FAMC claimed deductions of
$90,000, $130,000, and $75,000, respectively, for consulting fees
paid to Silbernagel. Respondent disallowed these deductions,
contending Silbernagel performed few or no consulting services for
FAMC and that the payments to Silbernagel were in fact additional
payments with regard to Leste's and Moore's purchase of FAMC's
stock from VALC. Further, as a result of FAMC's payments to
Silbernagel, respondent determined that Leste and Moore each had
3 Silbernagel's tax returns were not introduced into
evidence; however, respondent did not challenge Silbernagel's
assertion that the consulting fees were reported as ordinary
income.
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