- 8 -
Petitioners contend that the fact that PAYS and its
shareholders did not hesitate to file suits against each other
when a shareholder left the firm shows that PAYS’ covenant not to
sue had value. We recognize that PAYS’ covenant not to sue may
well have had value. However, petitioners have not given us a
satisfactory basis to estimate its value.
We conclude that petitioners have failed to show that they
may deduct $37,739, or any other amount, as a litigation
expense.4
B. Whether Petitioners Are Liable for the Accuracy-Related
Penalty for Substantial Understatement Under Section 6662
Petitioners contend that they are not liable for the
accuracy-related penalty under section 6662 because they properly
relied on their accountant and because the transaction was
complex.
A taxpayer may be liable for an accuracy-related penalty on
a substantial understatement of tax. See sec. 6662. The
understatement is reduced to the extent that it (1) is based on
substantial authority, (2) is adequately disclosed on the return
3(...continued)
$200,000 to $250,000 or that it was worth at least $92,039, the
amount of their adjusted basis. Regardless of the value of
petitioner’s PAYS stock, it would not establish the value of
PAYS’ covenant not to sue for the reasons given in the
accompanying text.
4 Because of this conclusion, we need not decide, as
petitioners contend, whether 1994 is the proper year to deduct
the litigation expense.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 Next
Last modified: May 25, 2011