Pelton & Gunther, Professional Corporation - Page 4




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          policyholders after the controversies were resolved and the cases           
          were closed.  Cases were often open for more than 1 year.  Some             
          bills from P&G to CSAA were for litigation costs only, some were            
          for legal fees (services) only, and some were for both costs and            
          fees.  P&G’s fees were paid by CSAA at a stated hourly rate.  P&G           
          claimed as a deduction litigation costs it paid on behalf of                
          CSAA’s policyholders, either from the $400 retainer or as                   
          advances, in the year that it paid the litigation costs.  P&G               
          reported the $400 retainers and the reimbursements of litigation            
          costs as income in the year they were received by P&G.                      
               P&G’s deductions for litigation costs were as follows:                 
                    Fiscal year ending            Litigation costs                    
                    May 31, 1990                  $262,771.60                         
                    May 31, 1991                  280,332.39                          
          May 31, 1992                   382,365.84                                   
                    May 31, 1993                  358,092.07                          
                    May 31, 1994                   254,562.73                         
               P&G reported retainers and reimbursed litigation                       
          costs as income as follows:                                                 
          Retainers and reimbursed                                                    
                    Fiscal year ending           litigation costs                     
                    May 31, 1991             $242,867.08                              
                    May 31, 1992                   361,880.37                         
                   May 31, 1993                   377,767.17                         
                    May 31, 1994                   276,686.05                         
               Respondent, in the notice of deficiency, disallowed a                  
          portion of the total deduction petitioner claimed for litigation            
          costs, reduced income by the amount of reimbursed previously                






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