- 9 -
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.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011