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On its consolidated corporation income tax return for the
1989 tax year, petitioner reported on Schedule M-1 a deduction
for “LEGAL AND RELATED EXPENSES IN CONNECTION WITH: CA ATTORNEY
GENERAL LITIGATION” in the amount of $1,074,867. This deduction
is found on the tax return Schedules M-1 and M-2 at the second
page of Statement 429 of the 1989 return. The 1989 tax return
includes this amount as a Form-1120, U.S. Corporation Income Tax
Return, line-26 deduction as detailed on Statement 82 of the
return.
During the 1990 tax year, American Stores’ subsidiary, Lucky
Stores, paid $2,666,045 for legal fees associated with the
antitrust litigation with the attorney general of California.
American Stores charged these legal fees to account No.
650800/7025, Lucky Acquisition, and moved these expenses to Alpha
Beta. American Stores capitalized the $2,666,045 for legal fees
on the financial books and records of Alpha Beta for the 1990 tax
year. Petitioner’s accountants prepared documentation for these
legal fees.
On petitioner’s corporation income tax return for the 1990
tax year, petitioners claimed a deduction for “LEGAL FEES - CA
ATTORNEY GENERAL LITIGATION” in the amount of $2,666,045. The
1990 return includes this amount as a Form-1120, line-26
deduction.
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