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restricted shares of stock in petitioner owned directly by him.
Petitioner also transferred to V. Eihusen $1,674,000, forgave the
Hall County judgment of $1,386,951, and factored in the golf cart
adjustment of $21,759 in release of litigation and employment
claims which V. Eihusen had, or may have had, primarily against
petitioner and its directors, officers, and employees. V.
Eihusen, in turn, delivered to petitioner in addition to the
noted shares of stock: (1) Certificates evidencing dismissal,
with prejudice, of all claims which he had outstanding against
petitioner in both the ESOP litigation and the Intermodal
litigation; (2) a global release of all claims he may have had
against petitioner, its subsidiaries, First National, the ESOP
committee, and petitioner’s officers, directors, employees, and
agents; (3) his resignation as a director, officer, and employee
of petitioner; and (4) his release of petitioner’s obligations
under the employment agreement.
Petitioner deducted $3,082,710 ($1,674,000 + $1,386,951 +
$21,759) as an ordinary and necessary business expense, noting on
its tax return that this expense was a “lawsuit settlement cost”.
Respondent disallowed the deduction, determining that the payment
in question was a nondeductible expense either because it was
capital or because it was made in connection with petitioner’s
reacquisition of its stock.
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