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expenses of HIF under section 162.4 Conversely, petitioners
contend that the legal fees are deductible by HIF as an ordinary
and necessary business expense and consequently are not a
constructive dividend to Mr. Hood.5 The parties base their
arguments primarily on Jack’s Maintenance Contractors, Inc. v.
Commissioner, T.C. Memo. 1981-349, revd. per curiam 703 F.2d 154
(5th Cir. 1983), a case in which this Court held in virtually
identical circumstances that the corporation was entitled to
deduct the legal fees but on appeal was reversed by the Court of
Appeals for the Fifth Circuit on the grounds that payment of the
legal fees constituted a constructive dividend to the
shareholder.
The facts in Jack’s Maintenance Contractors, Inc. are not
materially distinguishable from the facts of the instant cases.
4 Respondent effectively concedes that the legal fees are
ordinary and necessary business expenses of Mr. Hood, having
taken the position at trial and on brief that, in the event it is
decided that HIF’s payment of the legal fees is a constructive
dividend to Mr. Hood, he is entitled to a sec. 162 deduction in
the amount of the fees included in his income.
5 Respondent determined that the legal fees constituted a
constructive dividend to Mr. Hood, and petitioners have not
argued that the payment constituted compensation to him,
deductible by HIF on that basis. In any event, when a
corporation makes a payment to an individual who is both an
employee and a shareholder, the payment must have been intended
as compensation when made in order to be deductible as such. See
Paula Constr. Co. v. Commissioner, 58 T.C. 1055 (1972), affd.
without published opinion 474 F.2d 1345 (5th Cir. 1973). On its
return, HIF deducted the legal fees on a separate schedule from
the amounts it paid as compensation to Mr. Hood.
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