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VII. Legal Fees
On the 1994 tax return, under the heading other deductions,
petitioner deducted $57,862.03 for “Professional Fees”.
Remaining in dispute is the amount of $33,842 paid by petitioner
to a law firm in Washington, D.C. (the legal fees), for
representation of Norman in connection with the criminal
investigation. Petitioner argues that payment of the legal fees
is deductible as an ordinary and necessary expense of
petitioner’s incurred in its business because an unfavorable
result to the criminal investigation “would have destroyed
petitioner’s ability to remain in business by depriving the
Petitioner of its key employee.” Respondent argues that
petitioner’s payment of Norman’s legal fees was a constructive
dividend to Norman.
The issue presented herein is identical to that recently
considered by this Court in Hood v. Commissioner, 115 T.C. 172
(2000). Hood concerned the deductibility of legal fees paid by a
corporation on behalf of its sole shareholder and key,
indispensable employee in connection with his indictment for
criminal tax evasion relating to his operation of the same
business prior to incorporation. In Hood, we held that the
corporation’s payment of legal fees constituted a nondeductible
constructive dividend on the ground that the shareholder-
employee, not the corporation, primarily benefited from such
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