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and were the subject of litigation pending against the
predecessor partnership at the time of the transfer.10 The legal
fees were specifically incurred by the successor corporation for
the purpose of defending its interests in the pending litigation.
In the instant cases, HIF did not retain legal counsel to defend
its interests in the criminal proceedings against Mr. Hood; HIF
was not indicted.
For the foregoing reasons, we hold that HIF’s payment of the
legal fees was a constructive dividend, not deductible by HIF
during its 1991 taxable year, and taxable to Mr. Hood as a
dividend to the extent paid during calendar year 1991.11 We
hold further that HIF is not entitled to a deduction for the
legal fees it paid because they were the expenses of another, and
HIF has not shown that the payment was made to protect or promote
10 In these cases, petitioners have not argued reliance on
respondent’s positions announced in Rev. Rul. 95-74, 1995-2 C.B.
36; Rev. Rul. 83-155, 1983-2 C.B. 38; or Rev. Rul. 80-198, 1980-2
C.B. 113. In those rulings, respondent permitted transferee
corporations to deduct certain liabilities, including contingent
liabilities, transferred from predecessors in sec. 351
transactions in various circumstances.
11 HIF had earnings and profits well in excess of the amount
of the legal fees paid, and petitioners have not disputed that
the payment was made out of earnings and profits. See secs.
301(a), (c), 316(a).
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