P. David Musgrave and Barbara J. Musgrave - Page 13

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          Commissioner, 24 T.C. 597, 618 (Bruce, J., dissenting), revd. 234           
          F.2d 660 (6th Cir. 1956) (citing Judge Bruce's dissent with                 
          approval).  Consequently, respondent argues that, because there             
          has never been a judicial determination that the S Corporation              
          would be ultimately liable for the amount of the embezzlement,              
          the S Corporation is not entitled to deduct the Color Q payment.            
               We do not agree with respondent.  In James E. Caldwell & Co.           
          v. Commissioner, supra, the Sixth Circuit Court of Appeals held,            
          inter alia, that an amount paid in satisfaction of a judgment               
          rendered against the corporate taxpayer for fraud was deductible            
          as an ordinary and necessary business expense.  We view the                 
          language cited by respondent as support for the taxpayer's                  
          entitlement to the deduction under the facts of the James E.                
          Caldwell & Co. case, not a statement of law that a judicial                 
          determination of liability is a prerequisite to a deduction.                
          Indeed, we have held to the contrary in Waring Prods. Corp. v.              
          Commissioner, 27 T.C. 921, 929 (1957) and Old Town Corp. v.                 
          Commissioner, 37 T.C. 845, 859 (1962).  Additionally, we have               
          allowed a deduction pursuant to section 162(a) for a payment in             
          settlement of a claim, even where it has not been ordered by a              
          court.  Old Town Corp. v. Commissioner, supra.                              
               As stated above, Mr. Jeffcott, who was an employee of the S            
          Corporation at the time of his embezzlement of funds from Color             
          Q, was providing services to Color Q pursuant to an engagement              
          letter between Color Q and the S Corporation for which the S                




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