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Corporation was paid fees by Color Q. The embezzlement suit was
brought by Color Q to recover the money allegedly embezzled by
Mr. Jeffcott while he was providing services as an S corporation
employee to Color Q. Under such circumstances, we conclude that
the embezzlement suit arose out of activities of the S
Corporation's business.
Respondent next argues that the S Corporation did not
"substantively pay" Color Q, and that the S Corporation therefore
did not, within the meaning of section 162, "pay" or "incur" an
"expense" during 1988 with respect to the settlement of Color Q's
claim. Although respondent acknowledges that "the [Color Q]
payment was routed through the S Corporation's checking account
on November 16, 1988", respondent nonetheless argues that "the
amount paid to Color Q was not reduced to the S Corporation's
possession, and neither the [Montgomery County Court] nor the
other parties intended that it be reduced to the S Corporation's
possession."
We think that respondent's focus on the source of the funds
used to make the Color Q payment is misplaced. The fact that the
parties to the insurance suit agreed that the insurance proceeds
would be used to settle the embezzlement suit does not diminish
the fact that the S Corporation ultimately issued its own check4
4 As set forth above in our findings of facts, the record
contains a check drawn on the S Corporation's account to Color Q
et al. in the amount of $193,500 in full settlement of the
(continued...)
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