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D. Petitioners’ Income Tax Return
Frank Melvin (Melvin), a certified public accountant
(C.P.A.) licensed in Texas, prepared petitioners’ 1994 income tax
return. Petitioners deducted $75,345 on their 1994 Schedule C,
Profit or Loss From Business (Sole Proprietorship), for
litigation settlement (i.e., PAYS’ covenant not to sue). On
Schedule D, Capital Gains and Losses, they reported that they
sold PAYS stock for $75,345, that their basis in that stock was
$75,345, and that their net long-term capital gain or loss was
zero.
OPINION
A. Whether Petitioners Paid $37,739 to Settle a Threatened
Lawsuit for 1994
1. Contentions of the Parties
Petitioners contend that a taxpayer may deduct as a business
expense settlement payments made to avoid litigation related to
the taxpayer’s business. See Anchor Coupling Co. v. United
States, 427 F.2d 429, 433 (7th Cir. 1970). Petitioners contend
that petitioners paid at least $37,739 to PAYS to settle PAYS’
threatened lawsuit against petitioner (i.e., for PAYS’ covenant
not to sue). Respondent contends that petitioners have not shown
how much they paid to settle the threatened lawsuit.
As cash basis, calendar year taxpayers, petitioners may
deduct an expense in the year in which the expense was paid in
cash or its equivalent. See Helvering v. Price, 309 U.S. 409,
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