DocketNumber： Docket No. 8848-96
Citation Numbers： 77 T.C.M. 1181, 1999 Tax Ct. Memo LEXIS 2, 1999 T.C. Memo. 1
Judges： GALE
Filed Date： 1/4/1999
Status： Non-Precedential
Modified Date： 4/17/2021
Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
GALE, JUDGE: Respondent determined the following deficiency in, and penalty on, petitioner's Federal income tax:
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, the issues for decision are: (1) Whether Lakeview Automotive, Inc., an S corporation wholly owned by petitioner, is entitled to a deduction for a bad debt loss under
FINDINGS OF FACT 1999 Tax Ct. Memo LEXIS 2">*4 Middlebelt Road (Fence Property), on which he operated the Stark Fence Company. The rear and side doors of the Automotive Property building were not accessible except through the Fence Property. On September 29, 1989, for the consideration of 1, William transferred the Fence Property to Lakeview Realty Company, a general partnership formed on the same date and in which William and petitioner each owned a 50-percent capital interest. There is no evidence that petitioner made any capital contribution to the Lakeview Realty Company partnership in exchange for his 50-percent capital interest. The Fence Property was appraised at 150,000 on October 30, 1989. Also on September 29, 1989, William conveyed his interest in the Automotive Property by a quitclaim deed to Lakeview for the consideration of 1.
Petitioner and William began to have disagreements that made it impossible to operate Lakeview together. Their incompatibility resulted in an agreement executed on March 20, 1991, under which Lakeview agreed to redeem William's shares and petitioner agreed to purchase William's interest in the Fence Property (Redemption Agreement). On April 1, 1991, pursuant to the Redemption Agreement, 1999 Tax Ct. Memo LEXIS 2">*5 Lakeview paid 490,000 to William in redemption of his shares, thereby terminating his interest in the corporation, and petitioner paid 75,000 to William in exchange for William's interest in the Fence Property. 1999 Tax Ct. Memo LEXIS 2">*6 The Redemption Agreement further provided for the repayment of a 39,079.75 debt Lakeview owed to William and contained a general release provision whereby the parties -- namely, petitioner, William, and Lakeview -- agreed to mutually forgive and release each other from any claims existing as of the April 1, 1991 closing date (except the aforementioned debt of Lakeview to William, payment of which was to be made at closing).
Subsequent to the execution of the Redemption Agreement, William became convinced he had been cheated. In William's view, petitioner and Lakeview's attorney had taken advantage of his diminished capacity, caused by a near fatal aortic aneurysm, the earlier death of his wife, and his emotional distress resulting from the disagreements with his son, to pressure him into the buyout against his best interests and at an unconscionable price.
On November 1, 1991, William filed an action in State court naming Lakeview, petitioner, and Lakeview's attorney as defendants, and seeking rescission of the Redemption Agreement, return of the Fence Property, an accounting and appointment of a receiver to operate Lakeview, and damages from Lakeview, petitioner, and the corporate attorney, including punitive damages from the latter two. The complaint alleged undue influence on the part of petitioner and the corporate attorney, failure of consideration, breach of fiduciary duty by the corporate attorney and by petitioner in his role as an officer of Lakeview, and intentional infliction of emotional distress by petitioner. William's complaint was submitted for mediation, and on August 10, 1992, a mediation 1999 Tax Ct. Memo LEXIS 2">*7 panel unanimously proposed an award of 100,000 in favor of William for which petitioner and Lakeview would have joint and several liability, and an award of 30,000 for which the corporate attorney would be liable. William rejected the mediation proposal, and the case proceeded to trial. A jury found in favor of the defendants on all counts except rescission, which was decided in favor of the defendants by the court on November 2, 1992. Lakeview paid 93,491 in legal fees during 1992 in connection with the foregoing litigation and claimed a deduction therefor on its return for that year.
Sometime in late 1992 petitioner engaged a certified public accountant to prepare amended returns for Lakeview for the years 1984 through 1990 in order to report income that petitioner believed had previously been unreported by Lakeview. It was petitioner's belief that Lakeview had failed to report income from cash sales in those years, due to William's practice of removing all or most cash from the register and splitting it with petitioner. The accountant computed a ratio of cash to other sales for the then-most recent 18-month period, and on the basis of that ratio computed an estimate of the 1999 Tax Ct. Memo LEXIS 2">*8 cash sales that may have occurred, but were not reported, for the years 1984 through 1990. On the basis of these estimates, the accountant prepared amended returns for Lakeview that reported additional income in each of the foregoing years. There are no work papers, corporate records, or other documentation in the record that support the accountant's estimates.
In December 1992, Amended U.S. Corporation Income Tax Returns (Forms 1120X) for Lakeview's 1984, 1985, 1986, 1987, and 1988 taxable years, and amended U.S. Income Tax Returns for an S Corporation (Forms 1120S) for Lakeview's 1989 and 1990 taxable years, were prepared and signed by the accountant as return preparer. The returns were subsequently filed on an unknown date. The returns reported previously unreported income of Lakeview totaling 189,098. Petitioner filed Amended U.S. Individual Income Tax Returns (Forms 1040X) for his 1989 and 1990 taxable years reporting his allocable share of the previously unreported income reported on Lakeview's amended returns for those years.
Sometime in December 1992, petitioner caused to be prepared an "Agreement to Release and Hold Harmless" (Release Agreement) that was to be executed 1999 Tax Ct. Memo LEXIS 2">*9 by petitioner, William, and Lakeview. The Release Agreement was subsequently presented to William in late 1992 or in 1993. The Release Agreement certified that the parties had reviewed the Lakeview amended returns discussed above and contained a representation by the parties that they would file their individual State and Federal income tax returns (including any amended returns) in a manner consistent with Lakeview's amended returns. The Release Agreement further contained an acknowledgment by William of an indebtedness of 131,895 to Lakeview, Lakeview's forgiveness of the debt in 1992, and William's acknowledgment of receipt of an IRS Form 1099 reporting nonemployee compensation in that amount from Lakeview for 1992. Finally, the Release Agreement certified that the parties had reviewed another IRS Form 1099 reporting income of 75,000 paid to William by Lakeview in 1992, which was described as "for consulting services rendered and in consideration for this Agreement". The Release Agreement was not executed.
Notwithstanding the failure to execute the Release Agreement, Lakeview issued a Form 1099 for 1992 reporting income of 131,895 paid to William Stark, on which the payment 1999 Tax Ct. Memo LEXIS 2">*10 was characterized as "Nonemployee compensation". On its 1992 return, Lakeview deducted 134,116 Also notwithstanding the failure to execute the Release Agreement, Lakeview issued a 75,000 check that was dated December 30, 1992, and made payable to William. William deposited the check on April 1, 1993. The following handwritten legend appears on the back of the check above William's endorsement: A Form 1099 reporting income of 75,000 paid to William was issued by Lakeview for 1992, on which the payment was characterized as "Nonemployee compensation". On its 1992 return, Lakeview claimed 1999 Tax Ct. Memo LEXIS 2">*11 a 75,000 deduction for "rent". In 1990, when petitioner and William were 50-percent shareholders of Lakeview, Lakeview had purchased automobiles for use by William and petitioner. Lakeview paid 31,878.25 to purchase an automobile for William's use. In connection with that purchase, the car dealer issued a check for 9,000 to Lakeview as payment for a traded-in vehicle, and William deposited the check into his personal account. During the tax year 1992, a fence gate at the entrance to Lakeview's premises was hit by a gravel truck and was damaged beyond repair. Lakeview arranged for the installation of a new gate, which was mounted on wheels and opened parallel to the fence, as opposed to swinging on a hinge as the old gate had operated. In addition, poles were added to the fence to support the new sliding gate. On its 1992 return, Lakeview deducted the 2,000 that it paid for the fence gate work as a repair expense. Also during 1992 Lakeview paid a roofing contractor for work done on the roof of the Automotive Property to correct leaks. Previous attempts at repairing the roof were unsuccessful, due to the fact that the roof had originally been designed to collect water for cooling 1999 Tax Ct. Memo LEXIS 2">*12 purposes. Consequently, the roofing material was removed down to the wooden structure of the building, to which a new roof drain was added, and a new roof was reapplied. The replacement roof is expected to last 20 years. On its 1992 return, Lakeview deducted the 3,400 that it paid for the roof work as a repair expense. OPINION 1. "FORGIVENESS OF DEBT" DEDUCTION Respondent disallowed a 134,116 "forgiveness of debt" deduction claimed by Lakeview on its 1992 return. Petitioner contends that from 1984 through 1990, William skimmed cash from Lakeview and split it with petitioner. when petitioner subsequently became the sole shareholder of Lakeview, he filed amended corporate returns for Lakeview reporting additional income for those years totaling 189,098, based upon his accountant's estimate of Lakeview's cash sales during the period. Petitioner contends that although he repaid to Lakeview his share of the diverted cash, William did not, and thus remained obligated to the corporation for the diverted amounts. The 134,116 "forgiveness of debt" deduction claimed by Lakeview in 1992 represents the sum of what petitioner contends is William's share of the skimmed cash, plus the price 1999 Tax Ct. Memo LEXIS 2">*13 of an automobile purchased for William with corporate funds, along with the 9,000 check issued to Lakeview for a traded-in car that William converted to personal use. Petitioner and William together owned 100 percent of the stock of Lakeview at the time when petitioner contends that cash was skimmed, and petitioner concedes that he received half of the diverted funds. The same is true regarding the automobiles provided to them. The diversion of Lakeview's assets was not a theft for purposes of allowing the corporation a deduction. b. BAD DEBT DEDUCTION Petitioner alternatively contends that William's diversions of corporate funds gave rise to a debt by operation of law that was owed to Lakeview, and that this debt became worthless in 1992, thereby entitling it to a bad debt deduction under The existence of a debt for purposes of Petitioner's argument fails for several reasons. First, petitioner has failed to demonstrate the amount of the debt. A debt for purposes of Second, petitioner has not shown that the debt became worthless in 1992. Even if William's purported debt to Lakeview somehow survived the release in the Redemption Agreement, petitioner has failed to show that it became worthless in 1992. Petitioner contends that he had sufficient evidence of the worthlessness of the debt in 1992 based on the advice of his attorney that the cost of collecting the debt would have exceeded its value. In making this argument, petitioner concedes that William had sufficient assets from which to collect the debt that petitioner claims was owed to the corporation. 1999 Tax Ct. Memo LEXIS 2">*19 Where the surrounding circumstances indicate a debt is worthless and uncollectible, and the legal action to enforce payment in all probability would not result in satisfaction on execution of a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt. We do not believe that the record, including the testimony of petitioner's attorney, supports petitioner's contention that the cost of collecting on the alleged debt would have exceeded its value. Petitioner's attorney in the litigation over the Redemption Agreement, William Horton, testified that based on his experience in litigating against William, he believed that William would be a tenacious and difficult adversary in any further litigation. In light of this experience, Mr. Horton believed that pursuing the debt "wasn't worth it" and so advised petitioner and his accountant. This testimony does not establish that the costs of collection would exceed the value of a debt claimed to equal 134,116. 1999 Tax Ct. Memo LEXIS 2">*21 Indeed, petitioner presented no evidence that he or Lakeview ever even made a demand for payment to William. In light of the fact that William had sufficient assets with which to pay the alleged debt, we do not believe that petitioner has proven that attempts to collect on the debt would have been futile. We thus conclude that petitioner has failed to prove that, assuming a bona fide debt existed, it was worthless. 2. RENT DEDUCTION Lakeview deducted 75,000 as rent on its 1992 return, which was disallowed by respondent. Petitioner claims that Lakeview paid 75,000 to William in late 1992 as "back rent" on the Fence Property. Petitioner testified that sometime after the conclusion of the trial in the action brought by William, William demanded that he be paid rent by Lakeview for Lakeview's use of the Fence Property during the period that he owned it outright (which was from sometime in 1984 until September 29, 1989). According to petitioner, the 75,000 figure was based on his computation of annual rent equal to 10 percent of the Property's appraised value of 150,000 for 5 years (15,000 (10 percent of 150,000) X 5 years = 75,000). Petitioner offered no evidence to corroborate 1999 Tax Ct. Memo LEXIS 2">*22 his testimony, and a substantial amount of other evidence undermines it. First, contrary to petitioner's testimony at trial, Lakeview earlier characterized the 75,000 differently on the Form 1099 it prepared with respect to the payment. On the Form, the box for "Nonemployee compensation" was checked rather than the box for "Rent". Previously, in the Release Agreement prepared at petitioner's direction, the 75,000 payment was characterized as "for consulting services rendered and in consideration for this Agreement". Lakeview's accountant testified that it was his understanding that the 75,000 payment was intended as consideration for William's execution of the Release Agreement. William denied providing any consulting services to Lakeview during 1992, and in light of the fact that he was involved in acrimonious litigation with the company and petitioner during that time, we find his denial credible. Second, petitioner's testimony is further contradicted by William's testimony that he never demanded rent, but instead sought to be paid the remaining one-half of the purchase price he considered owed to him for the Fence Property. (William had previously received a payment of 75,000 1999 Tax Ct. Memo LEXIS 2">*23 for his one-half interest in the Fence Property as part of the Redemption Agreement in 1991, and although he had previously gifted the other one-half interest in the Fence Property to petitioner in 1989, he claimed at trial that he did not understand or intend the gift.) On the 75,000 check issued to him by Lakeview on December 30, 1992, William wrote above his endorsement that the amount was received as payment owed for one-half interest in the Fence Property. Third, the surrounding circumstances do not support petitioner's contention at trial. During the same period for which petitioner claims William sought back rent for the Fence Property, William also owned outright the Automotive Property which was also being used by Lakeview. We find it implausible that William would have demanded back rent from Lakeview for one parcel but not the other. Finally, petitioner has offered no evidence that 15,000, or 10 percent of appraised value, per year represented the fair rental value of the Fence Property, or that 5 years is the appropriate rental period. In the circumstances, we find it more likely that the 75,000 payment was premised on one-half of the appraised value of the Fence 1999 Tax Ct. Memo LEXIS 2">*24 Property; petitioner's formula has the appearance of an after-the-fact rationale. 3. LEGAL EXPENSES a. BACKGROUND -- ORIGIN OF THE CLAIM TEST Respondent argues that Lakeview is not entitled to deduct 93,491 in claimed legal expenses incurred in connection with the lawsuit brought by William because the lawsuit constituted a personal dispute between William and petitioner. Thus, respondent contends, under the "origin of the claim" test of Petitioner likewise employs the "origin of the claim" test, and argues against capitalization of the legal expenses on the grounds that they were expended to defend against an attack on the business, that was "in essence a hostile takeover attempt", and accordingly are deductible as ordinary and necessary business expenses under the reasoning of We disagree with both of the analyses offered by the parties, but hold for respondent for different reasons. The Supreme Court has held that the determination of whether a litigation expense is a deductible business expense or a nondeductible personal one depends upon "the origin and character of the claim" being litigated. The "origin of the claim" test is likewise used to determine whether litigation expenses are to be classified as ordinary or capital. 1999 Tax Ct. Memo LEXIS 2">*27 Application of the "origin of the claim" test requires an examination of all the facts and circumstances and focuses on the "kind of transaction" from which the litigation stems. b. PERSONAL VERSUS BUSINESS EXPENSE The lawsuit in which the legal expenses were incurred was brought by William against petitioner, Lakeview, and Lakeview's attorney 1999 Tax Ct. Memo LEXIS 2">*28 decision-making or to embarrass him in front of Lakeview's employees, petitioner's periods of silence, and petitioner's willful absence from the business premises. As relief, William sought rescission of the Redemption Agreement and return of his Lakeview stock and interest in the Fence Property, appointment of a receiver and an accounting, consequential damages stemming from his loss of income from Lakeview and his income tax liabilities incident to the disposition of his stock and real property, and damages for intentional infliction of emotional distress. Based on our review of the pleadings in the lawsuit and other evidence in the record, we believe that William's principal claims in the litigation were for the return of his Lakeview stock and the Fence Property. The other damages sought by him were largely derivative, designed either to preserve the status quo ante (such as the accounting and appointment of a receiver), or to compensate him for consequential losses resulting from the stock redemption and sale of the Fence 1999 Tax Ct. Memo LEXIS 2">*29 Property, or to punish the defendants for wrongful acts that led to or were connected with his decision to enter the Redemption Agreement (e.g., punitive damages or damages for intentional infliction of emotional distress). Respondent argues that under We believe respondent misapplies Gilmore. Petitioner and William had been business partners. Their dispute, and William's claims, arose from the terms and circumstances of William's buyout and, to a certain extent, petitioner's treatment of him in the workplace. We believe that all of the claims concerned actions by petitioner in his capacity as a shareholder, officer, or employee of Lakeview, or in the workplace. In our view, these claims had their origin in "income-producing activities" as that term was used in Gilmore to distinguish the origins of deductible business 1999 Tax Ct. Memo LEXIS 2">*30 expenses from those of nondeductible personal ones. That the litigants were father and son, and their dispute heavily infused with familial emotions, does not make the attendant legal expenses "personal" within the meaning of Gilmore. Had Mr. Gilmore's wife also been his business partner, and sought a portion of the automobile dealership stock on that basis, the Court may well have reached a different result. Cf. Moreover, we believe that the return of his Lakeview stock was the most significant relief sought by William, given its value in relation to the other relief sought. That stock had been redeemed by Lakeview, not purchased by petitioner. Accordingly, we have difficulty seeing how the expenses of defending against William's effort to reclaim the Lakeview stock were personal to petitioner rather than an expense of Lakeview. Such is not the case with the Fence Property, however. Although neither party has addressed the issue, 1999 Tax Ct. Memo LEXIS 2">*31 we do not believe that Lakeview is entitled to deduct any portion of the legal fees allocable to the defense of William's effort to reclaim his interest in the Fence Property. Pursuant to the Redemption Agreement, petitioner personally purchased William's interest in the Fence Property; it was thus not a corporate asset and Lakeview's expenditures in defense of petitioner's title to it were, strictly speaking, a constructive dividend. 1999 Tax Ct. Memo LEXIS 2">*32 Petitioner has not provided, and we are unable to discern, any basis for allocating a portion of the legal fees to the Fence Property defense. In any event, the failure to allocate is of little consequence because, as discussed more fully infra, the origin of the claim related to these legal expenses was the process of acquisition of a capital asset, in this instance an interest in the Fence Property. c. CAPITAL VERSUS ORDINARY To the extent that the fees are not personal to petitioner but an expense of Lakeview, we must decide whether such expense is required to be capitalized. "[S]tock is most naturally viewed as a capital asset," 1999 Tax Ct. Memo LEXIS 2">*33 This Court has held that where the circumstances surrounding the sale of stock (not sold as inventory) are the subject of litigation that arose subsequent to the transaction, the legal fees incurred are capital expenditures. In the instant case, the essence of the lawsuit brought by William against Lakeview and petitioner was an effort to rescind the contract under which Lakeview redeemed William's stock. Consummation of that contract, the Redemption Agreement, was a transaction involving the acquisition and disposition of a capital asset, stock. Sec. 1221; Petitioner, again relying on Petitioner contends that we should follow the Court of Appeals for the Seventh Circuit's decision and find the legal expenses at issue herein deductible because they were incurred in "a defense to an attack on the business" or "to thwart what amounted to a hostile takeover attempt". However, the instant case provides no occasion for us to consider whether to adopt the reasoning of the Court of Appeals decision, because it is readily distinguishable. Petitioner's attempt to characterize William's effort to rescind the Redemption Agreement as a hostile takeover attempt or an attack on existing business practices is simply unavailing. The critical difference is that the dispute in this case was over the terms of a completed capital transaction. The origin of William's lawsuit was a capital transaction, namely, the redemption of his stock and the sale of certain real property to petitioner, which William sought to rescind. This case thus falls squarely 1999 Tax Ct. Memo LEXIS 2">*38 within the rule that legal expenses incurred in the acquisition of a capital asset must be capitalized if "the origin of the claim litigated is in the process of acquisition itself." In defending against William's lawsuit, Lakeview sought to preserve the terms of a completed capital transaction. Lakeview was successful in that regard. The legal fees incurred by Lakeview were thus expended to facilitate a capital transaction, not to thwart it, and they produced benefits extending beyond the taxable year, e.g., the removal of a shareholder deemed troublesome by the surviving shareholder, the elimination of conflicting views regarding management, etc. Requiring that these legal fees be capitalized thus conforms to the guidelines established by the Supreme Court in 4. EXPENDITURES ON GATE AND ROOF Respondent disallowed deductions claimed by Lakeview as repair expenses that included 3,400 for the replacement of a roof and 2,000 for the replacement of a fence gate. We agree with respondent that these expenses were capital in nature and not currently deductible. Costs of repairs which keep property used in a trade or business in an ordinarily efficient operating condition may be deducted as an ordinary and necessary business expense under Petitioner did not repair the gate; he replaced it. Ordinarily, a replacement constitutes a capital expenditure, but petitioner argues that because the gate is a part of the fence, replacement merely restored the fence to its prior condition and did not prolong its life. Respondent takes the position that the costs of the gate must be capitalized because they constitute a "major repair or replacement." Regardless of whether the gate is viewed as separate from or integral to the fence, we believe the substantial nature of the replacement renders it a capital expenditure. Furthermore, the new gate did improve the property as it freed up the area that formerly was necessary for the path of the old swing gate. Poles were added to the existing fence to support the new gate. Cf. We next consider the 3,400 deduction claimed by Lakeview with respect to work done on its roof. The roof was removed "right down to the wood" and then replaced, along with the addition of a new roof drain. Petitioner relies on 5. COMPUTER Respondent dissallowed a deduction taken by petitioner with respect to computer equipment in the amount of 723. (Although respondent uses the figure of 773 in his brief, based on the entire record the correct figure is 723.) Since petitioner has not addressed this issue, he is deemed to have conceded it. See Rules 149(b), 142(a). 6. ACCURACY-RELATED PENALTY In the Notice of Deficiency, respondent determined that petitioner is liable for an addition to tax for a substantial understatement of income tax under Petitioner contends that there was reasonable cause for the tax treatment of the items at issue because the deductions claimed by Lakeview were based on the advice of a certified public accountant (C.P.A.). The determination 1999 Tax Ct. Memo LEXIS 2">*44 of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the relevant facts and circumstances. Petitioner has shown that Lakeview acted with reasonable cause in claiming the 134,116 "forgiveness of debt" deduction. There is ample evidence in the record that Lakeview's C.P.A. was provided with information concerning petitioner's position that William had diverted assets from Lakeview. Furthermore, Lakeview and its C.P.A. consulted legal counsel concerning whether recovery from William was feasible. Although Lakeview received incorrect advice regarding its "forgiveness of debt" deduction, we are satisfied that it took the deduction in good faith based on professional advice, after adequate disclosure to advisers. Therefore, there was reasonable cause and good faith with respect to the portion of the underpayment 1999 Tax Ct. Memo LEXIS 2">*45 attributable to the "forgiveness of debt" deduction. We do not believe that petitioner has shown that he relied in good faith on qualified advice, or otherwise had reasonable cause, with respect to the remaining deductions disallowed by respondent. With respect to the claimed deductions for the legal fees, gate, roof, and computer expenses, petitioner has failed to meet the burden of showing that Lakeview provided its accountant with complete and accurate 1999 Tax Ct. Memo LEXIS 2">*46 information. The only evidence pertaining to the issue is Lakeview's C.P.A.'s signature on the corporation's 1992 return, which we conclude is insufficient support for the inference that Lakeview supplied its C.P.A. with complete and accurate information. Petitioner argues on brief that "at no time did respondent even attempt to claim that [Lakeview's accountant] * * * had not been given all the facts by petitioner." However, the burden is on petitioner to affirmatively show that Lakeview's accountant received the requisite information. Rule 142(a); see To reflect the foregoing, Decision will be entered under Rule 155.
1. Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts, the supplemental stipulation of facts, and attached exhibits. ↩
2. Lakeview elected S corporation status on Dec. 23, 1988. ↩
3. Although the Redemption Agreement provided that William would execute a quitclaim deed with respect to his interest in the Fence Property, William had in fact previously quitclaimed such interest to the Lakeview Realty Company partnership. Accordingly, on the Apr. 1, 1991 closing date of the Redemption Agreement, William effected the transfer to petitioner by assigning his partnership interest in Lakeview Realty Company to petitioner, and petitioner on the same day executed a certificate of discontinuance of the Lakeview Realty Company partnership.
4. The record is silent regarding the difference between the 131,895 figure used both as the debt for which William Stark's acknowledgment was sought in the Release Agreement and as the amount of "Nonemployee compensation" reported as paid to William Stark by Lakeview, and the 134,116 figure deducted as the "forgiven" debt on Lakeview's 1992 return. ↩
5. We note that the sum of (i) one-half of the additional income of 189,098 reported on Lakeview's amended returns for 1984 through 1990 (i.e., 94,549), plus (ii) the 31,878 purchase price for the automobile provided William, plus (iii) the 9,000 converted check, equals 135,427, not 134,116. Petitioner offers no explanation for this discrepancy. ↩
6. The record is clear that William had sufficient assets from which to pay the alleged debt in 1992. In the previous year, William had received 42,579.75 from Lakeview in addition to the 490,000 received for his Lakeview stock and the 75,000 received for his half interest in the Fence Property. During 1992, William received another check for 75,000 from Lakeview. In addition, William owned several parcels of real estate.
7. The legal expenses incurred by Lakeview's corporate attorney in defending against William's lawsuit were not paid by Lakeview and are not at issue in this case. ↩
8. Because we conclude, with respect to the claim that the legal expenses were personal, that such expenses either were not personal or were personal because expended in defense of an asset held not by Lakeview but in petitioner's name, we find it unnecessary to address petitioner's argument based on
9. As noted previously, some portion of the legal fees may be attributable to defending petitioner against William's effort to reclaim his interest in the Fence Property. Any portion so attributable would be required to be capitalized because it arose from a transaction involving the acquisition of interests in real estate, also a capital asset.
We also have no basis in the record on which to determine the amount of legal fees allocable to William's other peripheral claims, such as intentional infliction of emotional distress. Faced with the absence of any evidentiary basis on which to attribute fees to any particular claim, we are unable to allocate the legal fees between deductible and capital expenses and hold that they are, in the aggregate, capital. See
10. The Court of Appeals concluded that a small portion of the fees was facilitative of the ownership change and were therefore required to be capitalized. ↩
11. The Court of Appeals concluded in the alternative that a significant portion of the costs was deductible under
12. On brief respondent argues that petitioner is also subject to a penalty for negligence or disregard of the rules or regulations under
13. Petitioner has not argued that any portion of the understatement should be reduced pursuant to
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