T.C. Memo. 2000-314
UNITED STATES TAX COURT
MIDWEST STAINLESS, INC. AND
ROBERT A. AND MARY J. LECHNER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24616-97. Filed October 4, 2000.
After L incorporated his cash method sole
proprietorship, he received payments for its jobs in
progress and paid the associated expenses. In
accordance with the advice of L’s accountant, the
receipts and payments were treated as those of the
corporation for book and tax purposes, and the
corporation made a book entry on its accounting records
showing a receivable from L to the corporation in the
amount of the receipts, which, the parties agree, was
valid debt. Thereafter, L was indicted for failing to
report income of the sole proprietorship on his pre-
incorporation personal income tax returns. L incurred
and paid legal defense fees, which, in accordance with
his accountant’s advice, were deducted on the
corporation’s returns and treated on the corporation’s
accounting records as reducing the receivable. The
parties have agreed that the corporation is not
entitled to deduct the legal defense fees and that L is
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