P. David Musgrave and Barbara J. Musgrave - Page 9

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          petitioners were assisted by two attorneys:  Carl Anthony Cramer            
          and Timothy Tye, of the law firm Tye and Tye.  In representing              
          petitioners, Mr. Cramer and Mr. Tye worked as a team but out of             
          different offices.  The attorneys rendered services in defense of           
          both the embezzlement suit and the insurance suit.                          
               On its 1988 return, the S Corporation deducted the Color Q             
          payment as a "Client Reimbursement" and reported a loss of                  
          $117,602 for the year.  Petitioners reported the loss on their              
          1988 return as petitioner's distributive share of the S                     
          Corporation's loss, resulting in a net operating loss on                    
          petitioners' 1988 return.  On their 1990 return, petitioners                
          deducted a net operating loss carryforward of $58,020, the amount           
          remaining from their 1988 net operating loss.  In the notice of             
          deficiency, respondent denied petitioners' net operating                    
          carryforward for taxable year 1990, thereby increasing                      
          petitioners' taxable income in the amount of $58,020.                       
          Consequently, only the $58,020 carryforward amount is in issue.             
               On its 1990 return, the S Corporation deducted legal fees in           
          the amount of $34,226 and reported $58,890 of income for the                
          year.  Petitioners reported the $58,890 amount on their 1990                
          return as their distributive share of ordinary income from the S            
          Corporation.  In the notice of deficiency, respondent denied the            
          S Corporation's deduction of legal fees, thereby increasing the S           
          Corporation's ordinary income for taxable year 1990 by $34,226.             
          Accordingly, respondent increased petitioner's ordinary income              




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