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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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