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indemnified by Corporation in connection with the personal
Federal income tax returns of him and his father, rather than the
returns of Corporation.
Corporation petitioned the Court with respect to the notice
of deficiency, alleging that it could deduct the subject expenses
as employee compensation. The Commissioner transferred the case
to her Appeals office for their development, and that office
eventually settled the case without trial. On January 9, 1995,
the Court entered a stipulated decision that allowed Corporation
to deduct the subject expenses.
On March 16, 1995, the respondent issued a notice of
deficiency to petitioners. In relevant part, this notice
reflected the respondent’s determination that: (1) The $149,386
of expenses deducted by Corporation on its 1989 tax return
($137,744 + $11,642) was constructive dividends to Mr. Sturman in
1990, and (2) the $205,424 of expenses deducted by Corporation on
its 1990 and 1991 Federal income tax returns ($41,671 + $163,753)
was constructive dividends to Mr. Sturman in 1991. In her
answer, respondent asserted alternatively that the amounts
deducted by Corporation were “in the nature of salary or other
compensation” paid on behalf of Mr. Sturman, and that Mr. Sturman
was not entitled to a deduction with respect thereto because the
underlying expenses were personal.
Discussion
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