Lenward C. Hood and Barbara P. Hood - Page 5




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          bank account of the sole proprietorship to be transferred to the            
          name of HIF.2                                                               
               In November 1990, Mr. Hood was indicted on two counts of               
          criminal tax evasion under 26 U.S.C. sec. 7201 (1994) and two               
          related counts of criminal false declaration under 26 U.S.C. sec.           
          7206(1) (1994).  The allegations in the indictment related solely           
          to the operation of, and Schedule C reporting of income from, the           
          sole proprietorship for calendar years 1983 and 1984.  Neither              
          HIF nor Mrs. Hood was charged in the indictment.  After a jury              
          trial in May 1991, Mr. Hood was acquitted on all counts.  During            
          its taxable year ended June 30, 1991, HIF paid $103,187.91 in               
          legal fees incurred in Mr. Hood’s defense and deducted this                 
          amount on its return for that year.  At the end of its June 30,             
          1991, taxable year, HIF had retained earnings of $247,593.  HIF             
          declared no dividends during that year.                                     
               Prior to Mr. Hood’s indictment, respondent had issued a                
          notice of deficiency to Mr. and Mrs. Hood (not at issue in these            
          cases) in which respondent determined that there were                       
          deficiencies and civil fraud additions to tax applicable in each            
          of the Hoods’ taxable years 1983 through 1986, based on the                 
          operation of the sole proprietorship in those years.  After Mr.             
          Hood’s acquittal, Mr. and Mrs. Hood entered into a settlement               

               2 Previously, a substantial check had been drawn on this               
          account to cover a security deposit and certain conversion costs            
          for premises leased to HIF.                                                 





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