- 11 -
In the instant case, Mr. Jeffcott, an employee of the S
Corporation, embezzled approximately $165,000 from Color Q, a
client of the S Corporation. At the time of the embezzlement,
Mr. Jeffcott was an employee of the S Corporation and was
providing services to Color Q pursuant to an engagement letter
between Color Q and the S Corporation and for which the S
Corporation was paid fees by Color Q. During the pendency of the
complaint in the embezzlement suit, Color Q discovered no
evidence that petitioner had personally participated in Mr.
Jeffcott's wrongful course of conduct. Additionally, the record
contains no evidence and no party alleges that either petitioner
or the S Corporation ultimately received any of the embezzlement
proceeds, which we take as a concession that the S Corporation
did not receive any of the embezzlement proceeds.
Because the S Corporation neither received nor had any claim
of right to any of the embezzlement proceeds, we find
respondent's reliance on the Skelly line of cases to be
misplaced. As the embezzlement proceeds were appropriated by Mr.
Jeffcott and not the S Corporation, such proceeds would not be
income to the S Corporation. Consequently, we conclude that the
Skelly line of cases is not applicable to the instant case.2
Respondent next argues that the Color Q payment was not an
"ordinary and necessary" business expense of the S Corporation
2 Respondent makes no argument that the deduction of the Color
Q payment should be disallowed under sec. 265.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011