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meaning of section 162(a) of the 1954 Code. We asked the
following questions: (1) Was the taxpayer entirely confident
that any suit which the plaintiff might bring could not succeed?
(2) did the taxpayer make the payment in question only for the
purpose of avoiding the damage to the taxpayer's credit,
reputation, and business generally which might result from such a
suit? and (3) was any such fear which the taxpayer may have had,
so far justified that a reasonable person in the taxpayer's place
would have thought a settlement at that figure less than the
damage which would follow from such a suit? Id.
The record establishes that the S Corporation made the Color
Q payment as a result of Mr. Jeffcott's actions performed while
he was an S Corporation employee and pursuant to an engagement
letter between Color Q and the S Corporation for which Color Q
paid fees to the S Corporation. The S Corporation was named as a
defendant in Color Q's embezzlement suit and was potentially
liable for the damages from the suit, treble damages under the
Ohio Corrupt Activities Act, the costs of the suit, and the
attorney's fees.
Applying the standards of Old Town Corp., we are satisfied
that it was reasonable to conclude that Color Q's claim might
succeed. The record shows that petitioner viewed Color Q's claim
seriously and that he sought the advice of his counsel, who
advised him to settle the claim. We are also satisfied that the
S Corporation made the payment in question to avoid damage to its
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