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same.”63 Id. We conclude that the Thompsons’ payments of
DeCastro’s legal fees generated allowable deductions that were
not a part of the improper tax benefits provided by the Thompson
settlement.
7. The Thompsons’ Failure To Report
Tax Benefit Income for 1993
While we agree with respondent that the Thompsons were
entitled to deduct the attorney’s fees paid to DeCastro in 1993,
we agree with petitioners that the Thompsons’ 1993 return is
incorrect in a different respect: it does not reflect the
Thompsons’ realization of income under the tax benefit rule.
Recall that the Thompsons deducted $44,165 of deficiency interest
expense for 1986-1987 ($16,251 for 1986 and $27,914 for 1987) as
a result of their interest prepayments for the deficiency years
1979-1981. This Court’s order and decision of August 26, 1992,
which held respondent to the terms of the Thompson settlement,
resulted in the Thompsons’ ultimately paying only $27,506 in
interest for those years.
This situation should have resulted in application of the
tax benefit rule. The tax benefit rule is a judicially created
principle that serves to remedy certain disparities inherent in
the use of an annual accounting system for the reporting of
63The statutory exceptions, none of which applies here, are
contained in sec. 162(c), (f), and (g). See sec. 1.212-1(p),
Income Tax Regs.
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