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OPINION
Deductibility of Payments
This case raises the question of whether petitioner is
entitled to deduct payments it made to Barbara after she ceased
providing services to petitioner. Petitioner argues that the
payments are deductible under section 162 as ordinary and
necessary business expenses on two bases: (1) The payments were
severance payments made in consideration for past services for
which Barbara had been undercompensated; and (2) the payments
served a business purpose by inducing Barbara’s retirement
because her presence in the workplace, which created tension,
disrupted petitioner’s operations. Respondent argues, inter
alia, that the payments lacked a business purpose because in
actuality they satisfied a personal obligation of a shareholder;
namely, Walter’s alimony obligations to Barbara. Respondent
argues alternatively that the payments were not deductible
because they were constructive dividends to Barbara, constituting
a distribution of her share of petitioner’s retained earnings
attributable to her past equitable ownership interest in
petitioner or the interest she acquired pursuant to the
Settlement Agreement. For the reasons discussed below, we agree
with respondent.
Petitioner relies heavily on the Pension Agreement to
support its position that the payments to Barbara were in the
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Last modified: May 25, 2011