Midwest Stainless, Inc. and Robert A. and Mary J. Lechner - Page 1

                                       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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