Peters, Gamm, West & Vincent, Inc., Richard L. West, Judith L. West, Marc A. Vincent, Deborah S. Vincent, Gary L. Gamm and Connie F. Gamm - Page 9

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          percent of the firm's business, was valued at around $100 million           
          and later grew to almost $500 million.  Trustees of the KPERS               
          fund informed IMG at a public meeting that the fund would no                
          longer utilize the services of PGWV if Peters were found to have            
          committed any of the alleged insider trading or any other                   
          wrongdoing.                                                                 
               PGWV claimed as a deduction legal fees in the amounts of               
          $128,854.71, $198,431.67, and $135,659.23 in computing its net              
          income on its subchapter S return for the tax years 1988 through            
          1990, respectively.  Respondent disallowed $123,103, $190,245,              
          and $128,131 of those amounts in her timely notices of                      
          deficiency, stating that it had not been established that those             
          amounts were for ordinary and necessary business expenses, rather           
          than nondeductible business expenses of Peters.  The pro rata               
          share of such deductions claimed by petitioners on their income             
          tax returns was disallowed.  Respondent has conceded that the               
          amounts claimed as legal fees were paid by PGWV.                            
                                       OPINION                                        
               The primary issue is whether PGWV, in computing net income             
          for subchapter S purposes, may deduct legal fees incurred in                
          defending an action brought by the SEC against petitioner Peters,           
          one of the shareholders of PGWV.  Section 162(a) allows a                   
          taxpayer to deduct ordinary and necessary expenses paid or                  
          incurred in carrying on a trade or business.  If we determine               
          that the amounts in question are not deductible as legal fees, we           




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