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paid by Capital Video in 1996, $423,101 was paid after
February 29, 1996, when Capital Video elected to be taxed as an
S corporation.
Capital Video was not named as a defendant in the above
criminal case, and Capital Video was not legally required to pay
the legal fees of Guarino.
For its taxable year ending February 29, 1996, Capital Video
timely filed its Federal Corporation Income Tax Return,
and Capital Video deducted thereon as ordinary and necessary
business expenses the $343,971 it had paid during its taxable
year ending February 29, 1996, as legal fees in connection with
the above criminal charges against Guarino.
For its short taxable year March 1 to December 31, 1996,
Capital Video timely filed its Federal Income Tax Return for an S
Corporation, and Capital Video deducted thereon as ordinary and
necessary business expenses the $423,101 it had paid during its
short taxable year as legal fees in connection with the above
criminal charges against Guarino.
On his 1996 individual Federal income tax return, Guarino
did not include in his reported income any portion of the
$343,971 in legal fees paid by Capital Video during its 1996
taxable year. Also (as a result of the $423,101 in deductions
claimed by Capital Video on its 1996 Federal Income Tax Return
for an S Corporation), Guarino’s share of the ordinary income of
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