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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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