John C. Archer and Nancy M. Archer - Page 2




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               1.   Whether petitioners may deduct $37,739 for 1994 which             
          petitioners contend they paid to settle a threatened lawsuit.1              
          We hold that they may not.                                                  
               2.   Whether petitioners are liable under section 6662(a)              
          for a penalty of $4,637.60 for 1994 for substantial                         
          understatement of income tax.  We hold that they are.                       
               Section references are to the Internal Revenue Code in                 
          effect for 1994.  Rule references are to the Tax Court Rules of             
          Practice and Procedure.  References to petitioner are to John C.            
          Archer.                                                                     
                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated and are so found.               
          A.   Petitioners                                                            
               Petitioner lived in Liberty, Texas, and petitioner Nancy M.            
          Archer lived in Austin, Texas, when they filed their petition.              
          Petitioners were cash basis, calendar year taxpayers.  Petitioner           
          is a lawyer who specializes in collecting delinquent taxes for              
          Texas counties and districts.                                               
          B.   Petitioner’s Law Firm                                                  
               Parmer, Archer, Young & Steen, P.C. (PAYS), a professional             
          service corporation, was incorporated before 1994 under the Texas           
          Professional Corporation Act.  PAYS provided legal services to              


               1  Petitioners concede that they may not deduct $37,606 of             
          the $75,345 that they deducted for settlement of a threatened               
          lawsuit.                                                                    




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