Midwest Stainless, Inc. and Robert A. and Mary J. Lechner - Page 9

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            defending against the criminal charges and claimed the payments                            
            as deductions on their corporation income tax returns.  In the                             
            case at hand, Mr. Lechner paid his own defense fees, but claimed                           
            no deductions for the payments on his joint returns.  Instead,                             
            Stainless made a journal entry on its accounting records showing                           
            that Mr. Lechner’s acknowledged debt to Stainless was reduced by                           
            the amount of the defense fees, and Stainless deducted that                                
            amount on its corporation income tax returns.                                              
                  Respondent’s deficiency notices disallowed the deduction                             
            claimed by Stainless and treated the corresponding debt reduction                          
            shown on its books of account as constructive dividend income to                           
            Mr. Lechner.3  Stainless has conceded that it is not entitled to                           
            the deduction claimed on its return for the fiscal year ended                              
            September 30, 1994, and respondent has conceded that the Lechners                          
            are entitled to deductions in corresponding amounts–-which they                            
            did not claim--on their individual income tax returns for the                              
            years in which the fees were paid.                                                         
                  Mr. Lechner deposited to his own account $239,595 of                                 
            receipts that were attributable to work in progress of the sole                            
            proprietorship as of the moment of incorporation.  Against the                             
            background of the criminal charges against Mr. Lechner for                                 

            3 There is no dispute that at all relevant times Stainless                                 
            had sufficient earnings and profits to cover any constructive                              
            dividend that might be determined.                                                         

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