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of the receivable as valid debt. We have accepted the parties’
stipulation to this effect.
With his accountant’s advice, Mr. Lechner and Stainless
treated his payments of his defense fees as payments of
corporate expenses that reduced the receivable. Respondent and
petitioners have agreed and made mutual concessions to the
effect, first, that the corporate deduction of the defense fees
is to be disallowed, contributing to a corporation income tax
deficiency, and, second, that Mr. Lechner is to be allowed a
Schedule C deduction in a corresponding amount, although he did
not claim a deduction for the defense fees on his income tax
returns. Although respondent characterizes his concession as
perhaps overly generous, it is identical to the Commissioner’s
concession in Hood v. Commissioner, supra, and appears to us to
be appropriate. However, this concession of the unclaimed
Schedule C deduction to Mr. Lechner will give him a personal tax
windfall unless his individual deduction is offset by a
constructive dividend in the amount of the debt reduction
evidenced by the corporate accounting entry reducing the
Stainless receivable from Mr. Lechner.
As this Court has recited numerous times, see, e.g., Halpern
v. Commissioner, T.C. Memo. 1982-31, the test for a constructive
dividend has two prongs: First, the corporation must have
conferred an economic benefit on the shareholder without
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