- 5 -
of $529,000 on its Form 1120, U.S. Corporation Income Tax Return,
filed for the taxable year ended January 31, 1990. The $529,000
deduction claimed for that year represented the net present value
of the $1 million lawsuit settlement.2
On March 7, 1995, respondent issued petitioner a statutory
notice of deficiency asserting deficiencies in income tax for the
taxable years ended January 31, 1990, and January 31, 1991. The
deficiency for the taxable year ended January 31, 1990, is based
upon the disallowance of the $529,000 lawsuit settlement
deduction claimed on petitioner's return for that year.3 The
2 According to the stipulation of facts, the Berros
collectively owned 100 percent of the stock in petitioner "during
and throughout the taxable year ended January 31, 1990." Yet,
the Option Agreement provides that the optionees have the option
to purchase the stock "from the Company". Moreover, petitioner,
rather than the Berros, deducted the settlement amount on its
return. Thus, there is confusion in the record as to whether the
Berros or petitioner was to be the seller of the stock under the
Option Agreement. Further, what we have here is a troubling
obvious contradiction, particularly in view of provisions in the
Option Agreement contemplating a change in the number of shares
outstanding "in order that each Optionee [Gloldman and Feldman],
upon exercise of his Option shall be entitled to purchase that
number of shares of Common Stock necessary to acquire a 24.5%
equity" interest in petitioner. And the confusion is further
compounded by the fact that there are strong indications in the
record that there was actually a change in the number of shares
outstanding because of the situation concerning Feldman, the
other optionee. Indeed, the record shows that Feldman actually
acquired shares representing a 24.5-percent equity interest in
petitioner.
3 Since respondent's present theory for disallowing the
settlement deduction was raised in the Amendment to Answer to
Amended Petition, respondent bears the burden of proof with
respect to that theory. Rule 142(a). However, the point was not
(continued...)
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011