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agreement with respondent in which it was agreed that Mr. and
Mrs. Hood were liable for deficiencies and civil fraud additions
to tax for, inter alia, tax years 1983 and 1984, the amount of
which was paid by Mr. Hood personally.3
In separate statutory notices of deficiency issued to HIF
and to the Hoods, respondent determined that HIF was not entitled
to deduct the legal fees incurred during HIF’s taxable year ended
June 30, 1991, to defend Mr. Hood (i.e., $103,187.91) and that
Mr. and Mrs. Hood received a constructive dividend equal to the
legal fees paid by HIF during calendar year 1991; namely,
$86,279.
OPINION
The central issue in these cases is whether HIF may deduct
the legal fees it paid for Mr. Hood’s defense against criminal
tax evasion and false declaration charges arising from Mr. Hood’s
reporting of the Schedule C, Profit or Loss From Business, income
of a predecessor sole proprietorship. Respondent contends that
HIF may not deduct the legal fees because their payment
constitutes a constructive dividend to Mr. Hood and they
otherwise do not qualify as ordinary and necessary business
3 We take judicial notice of the stipulated decision of this
Court entered in the referenced case under which the Hoods agreed
they were liable for deficiencies and additions to tax totaling
$107,517 plus additional amounts computed as 50 percent of the
interest on $6,105, $27,530, and $63,817 for 1983, 1984, and
1985, respectively, and were due an overpayment of $28,350 for
1986.
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