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relate, rather than the potential consequences of a conviction on
the underlying charges, generally will control whether the legal
fees qualify as business expenses. United States v. Gilmore, 372
U.S. 39, 48 (1963).
In Lohrke v. Commissioner, supra, we adopted a two-prong
test for analyzing whether a taxpayer may deduct legal expenses
of another. First, we analyzed whether the purpose or motive of
the taxpayer in paying another person’s legal expenses was to
protect or promote the taxpayer’s business, and second, we
analyzed whether the expenses constituted ordinary and necessary
business expenses of the taxpayer’s business.
In their arguments herein, petitioners argue that the motive
or purpose of Capital Video in making the “tribute” payments to
Richichi was to protect and promote the business of Capital
Video, that Guarino’s conspiracy to evade the income taxes of
Richichi (the charge to which Guarino pled guilty) was directly
related to the “tribute” payments and to the related protection
from extortion that Capital Video received, and therefore that
Guarino’s legal fees relating to the conspiracy charge should
qualify as deductible business expenses of Capital Video.1
Respondent argues that petitioners have not established that
Guarino’s conspiracy to evade Richichi’s income taxes was
1 Petitioners make no argument that the legal fees in dispute
related to the various criminal charges against Guarino that were
dropped as part of the plea agreement.
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Last modified: May 25, 2011