WSB Liquidating Corporation - Page 9

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          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