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Video of Guarino’s legal fees conferred a significant economic
benefit upon Guarino, Capital Video’s sole shareholder, without
an expectation of repayment and was not necessary for the
business of Capital Video (i.e., the payment of the legal fees
was not necessary for Capital Video to receive Richichi’s
protection from extortion).
We conclude that the payment by Capital Video of the $93,936
in Guarino’s legal fees should be treated as a constructive
dividend to Guarino. As to the $423,101 in legal fees of Capital
Video that are disallowed herein as deductible business expenses
of Capital Video for its short taxable year ending December 31,
1996, such adjustment mechanically results in additional income
to Guarino in that same amount as a result of the corresponding
increase in Guarino’s share of the income of Capital Video, as an
S corporation.
If respondent’s income adjustments against Guarino are
sustained herein, as we have done, then Guarino argues that for
1996 he should be entitled to additional miscellaneous itemized
business expense deductions (subject to the percentage
limitations applicable thereto) in the amount of the constructive
dividend and the additional income of Capital Video, as an S
corporation, that is to be charged to Guarino. The apparent
basis for Guarino’s argument is that if he is to be charged with
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