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Petitioner was found guilty of conspiracy and substantive
counts of mail and wire fraud. On May 25, 1993, he was sentenced
to 37 months' imprisonment, a $10,000 fine, and a $200 special
assessment. Petitioner subsequently filed an appeal with the
Court of Appeals for the Ninth Circuit. On May 24, 1994, the
Ninth Circuit affirmed petitioner's conviction but reversed the
sentence and remanded for resentencing. On July 18, 1994,
petitioner was resentenced to 16 months' imprisonment, a $10,000
fine, and a $200 special assessment.
On his 1993 Individual Income Tax Return, petitioner took a
deduction of $125,000 for "Legal fees incurred in the defense of
indictment no CR92-62-WBE in the United States District Court for
the Southern District of California in which taxpayer was
convicted of mail fraud. Deduction pursuant to IRC section 162
and Commissioner v. Tellier 383 U.S. 687 (1966)." Petitioner's
filing status was married filing separate. On May 28, 1996, the
Commissioner issued a notice of deficiency to petitioner
disallowing the $125,000 deduction.2
1. Substantiation
Petitioner deducted $125,000 in legal fees on his 1993
return. His substantiation consists of three sets of documents.
2 A number of other issues were raised in the notice of
deficiency. However, they appear to have resulted from the
disallowance of the deduction for legal fees. Both parties
argued only the deductibility of the legal fees in their briefs
and trial memoranda.
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