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During the 1990 tax year, American Stores’ subsidiary, Lucky
Stores, paid $175,630 for legal fees associated with the
antitrust litigation with the attorney general of California. Of
the $175,630, Lucky Stores paid $95,355 to the law firm of
Sonnenschein, Carlin, Nath for legal work on the antitrust case
and paid $80,275 for other expenses related to the antitrust
case.
On petitioner’s corporation income tax return for the 1990
tax year, petitioner claimed a deduction on Form 1120, line 26
for various items including “Litigation Expenses” of $10,706,713.
American Stores included the $175,630 for legal fees and costs
identified above in the “Litigation Expenses”.
For financial reporting purposes, American Stores was
required to account for its acquisition of Lucky Stores using the
“purchase accounting” method pursuant to Accounting Practices
Board Opinion No. 16 (“APB 16"). Under this method, American
Stores’ acquisition was treated as an acquisition of Lucky
Stores’ assets. Lucky Stores’ liabilities were treated as if
they were assumed by American Stores in this hypothetical asset
acquisition.1 Under the purchase accounting method, petitioner
was required to identify and quantify all of Lucky Stores’
1On Mar. 13, 1989, American Stores filed a Form 8023,
Corporate Qualified Stock Purchase Elections, related to the
acquisition by American Stores of Lucky Stores and related
entities in the Lucky Stores affiliated group.
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