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Jack Farmer owned a sole proprietorship engaged in building
repair and construction contracting. He incorporated Jack’s
Maintenance Contractors, Inc., which assumed the business of the
sole proprietorship. He was president and sole shareholder of
the corporation and vital to its operations. Three years after
incorporation, he and his spouse6 were indicted and tried for
criminal tax evasion and false declaration with respect to the
alleged failure to report income from the sole proprietorship
during years prior to incorporation. The corporation paid the
legal expenses in defending the criminal charges against Mr. and
Mrs. Farmer, which were ultimately dismissed.
In this Court’s opinion in Jack’s Maintenance Contractors,
Inc., we allowed the corporate taxpayer a deduction for the legal
expenses. The Commissioner argued that under the “origin-of-the-
claim” test established in United States v. Gilmore, 372 U.S. 39
(1963), the legal fees were not deductible by the corporation.
We found, however, that the origin-of the-claim test in Gilmore
addressed only whether the legal fees were nondeductible
“personal” expenses or deductible “business” expenses. We
6 Petitioners point out that Mrs. Hood was not indicted,
unlike the wife of the sole shareholder in Jack’s Maintenance
Contractors, Inc. v. Commissioner, T.C. Memo. 1981-349, revd. per
curiam 703 F.2d 154 (5th Cir. 1983). Thus, while the payment of
legal fees in Jack’s Maintenance Contractors, Inc. arguably
benefited the shareholder’s wife, it did not benefit Mrs. Hood in
the instant cases. In other words, there is arguably less
benefit to Mr. Hood than there was to the shareholder in Jack’s
Maintenance Contractors, Inc.
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