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Capital for Cap Video for the period March 1 to December 31, 1996
(as reported on Guarino’s 1996 individual Federal income tax
return) was reduced by $423,101.
In respondent’s notice of deficiency mailed to Capital Video
for Capital Video’s taxable year ending February 29, 1996,
respondent disallowed the full $343,971 claimed ordinary and
necessary business deduction relating to Guarino’s legal fees.
In respondent’s notice of deficiency mailed to Guarino for
1996, respondent: (1) Treated the full $343,971 in legal fees of
Guarino that Capital Video paid during Capital Video’s taxable
year ending February 29, 1996, as a constructive taxable dividend
to Guarino, and (2) increased by $423,101 Guarino’s share of
Capital Video’s taxable ordinary income for the period March 1 to
December 31, 1996. Both of respondent’s adjustments mentioned in
this paragraph resulted in increases to Guarino’s taxable income
for 1996 in the full amounts of those adjustments.
Prior to trial, respondent conceded that $250,034 of the
above legal fees relating to Guarino that were deducted on
Capital Video’s tax return for its taxable year ending
February 29, 1996, was paid by Capital Video in 1995 and
therefore that $250,034 should not be charged to Guarino as
taxable dividend income for 1996. As a result of respondent’s
concession (of the $343,971 in total claimed legal fees that
respondent treated as a constructive dividend taxable to Guarino
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