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concluded (as the Commissioner had conceded) that the fees were
business rather than personal in origin and reasoned that the
“real issue” in the case was whether one taxpayer may deduct the
expenses of another. Relying on the exception in Lohrke v.
Commissioner, 48 T.C. 679 (1967), to the general rule that a
taxpayer may not deduct the expenses of another, see Deputy v.
du Pont, 308 U.S. 488 (1940), we held that the legal fees were
deductible by the corporation because the corporation had a
sufficient business purpose in paying what were concededly the
expenses of another (its shareholder/employee, Farmer); namely,
ensuring its continued operations because Farmer was an
indispensable employee. We further relied on Holdcroft Transp.
Co. v. Commissioner, 153 F.2d 323 (8th Cir. 1946), affg. a
Memorandum Opinion of this Court, in which a corporate successor
to a partnership was allowed to deduct legal fees with respect to
the settlement of outstanding claims against the parnership. In
Jack’s Maintenance Contractors, Inc., the appropriate treatment
by Mr. Farmer of the legal fees was not before us, and we did not
address the question of whether the corporation’s payment of the
fees was a constructive dividend.
The Court of Appeals reversed, holding that the fees were
not deductible by the corporation, on two grounds. First, the
Court of Appeals held that the legal fees were not deductible
because they constituted a constructive dividend. In finding a
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