Frank and Barbara Biehl - Page 1

                                   118 T.C No. 29                                     

                               UNITED STATES TAX COURT                                

                       FRANK AND BARBARA BIEHL, Petitioners v.                        
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 422-00.                 Filed May 30, 2002.                 

                   Ps are H and W.  H, a shareholder and former                       
              employee of D Corp., filed suit with W, also a                          
              shareholder of D, against D and its other shareholders                  
              for wrongful termination of H’s employment and for                      
              dissolution of D.  Following a jury verdict of $2.1                     
              million in favor of H on his wrongful termination claim,                
              Ps and D negotiated a global settlement under which D in                
              1996 paid a total of $1.2 million to settle H’s wrongful                
              termination claim, $799,000 to H and $401,000 to Ps’                    
              attorney; D settled Ps’ dissolution claims by agreeing                  
              to buy back Ps’ shares in D in an installment sale with                 
              payments scheduled to begin in 1997.  Ps did not report                 
              or disclose on their 1996 joint income tax return the                   
              $401,000 payment to their attorney, on the ground that D                
              made the payment pursuant to “a reimbursement or other                  
              expense allowance arrangement” under I.R.C. sec.                        
              62(a)(2)(A) and sec. 1.62-2, Income Tax Regs.  R                        
              determined that the payment to Ps’ attorney had to be                   
              included in Ps’ gross income and did not qualify as paid                
              pursuant to an “accountable plan” under sec. 1.62-2,                    

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