Court Opinion

ID: 4332896
Source: CourtListenerOpinion
Date Created: 2018-11-14 00:55:10.185277+00
Date Added: 2024-06-11T14:19:53.101066
License: Public Domain

115 T.C. No. 14

                UNITED STATES TAX COURT

  LENWARD C. HOOD AND BARBARA P. HOOD, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent

    HOOD’S INSTITUTIONAL FOODS, INC., Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 4160-97, 4161-97.         Filed August 25, 2000.

     H operated a sole proprietorship, and later
incorporated HIF, which assumed the business of the
sole proprietorship. H was sole shareholder and
president, and indispensable to the success, of HIF.
After HIF was incorporated, H was indicted and tried
for criminal tax evasion and false declaration arising
from the alleged failure to report income from the sole
proprietorship. HIF paid legal fees for H’s defense of
the criminal charges.

     Held, the facts of the instant cases are not
materially distinguishable from the facts of Jack’s
Maintenance Contractors, Inc. v. Commissioner, T.C.
Memo. 1981-349, revd. per curiam 703 F.2d 154 (5th Cir.
1983). In light of the reversal by the Court of
Appeals for the Fifth Circuit, we reconsider our
holding.
                               - 2 -

          Held, further, because the payment of legal fees
     primarily benefited H, it is a constructive dividend to
     H and not deductible by HIF. To the extent Jack’s
     Maintenance Contractors, Inc. v. Commissioner, T.C.
     Memo. 1981-349, is inconsistent with this holding, it
     is not followed.

          Held, further, because the legal fees were Mr.
     Hood’s obligation, HIF may not deduct the expenses of
     another; Lohrke v. Commissioner, 48 T.C. 679 (1967),
     distinguished. To the extent Jack’s Maintenance
     Contractors, Inc. v. Commissioner, supra, is
     inconsistent with this holding, it is not followed.

     Philip L. Kellogg, for petitioners.

     Alan R. Peregoy, for respondent.

     GALE, Judge:   These cases were consolidated for trial,

briefing, and opinion.   Respondent determined the following

deficiencies and accuracy-related penalties for petitioners

Lenward C. and Barbara P. Hood’s 1991 (calendar) taxable year and

for petitioner Hood’s Institutional Foods, Inc.’s, taxable year

ended June 30, 1991:

                                                    Sec. 6662(a)
     Petitioner                        Deficiency     Penalty

Lenward C. & Barbara P. Hood             $4,385         $877
Hood’s Institutional Foods, Inc.         41,196        8,239

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and
                                - 3 -

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions,1 the remaining issues for decision are:

     (1) Whether petitioner Hood’s Institutional Foods, Inc.

(HIF), may deduct legal fees it paid to defend its sole

shareholder, petitioner Lenward C. Hood, against criminal tax

evasion and false declaration charges that arose from the tax

reporting for Mr. Hood’s sole proprietorship, the business of

which was later assumed by HIF.    We hold that it may not.

     (2) Whether petitioners Lenward C. Hood and Barbara P. Hood

must include in income the amount of such legal fees paid by HIF

during calendar year 1991.    We hold that they must.

     (3) Whether HIF is liable for the section 6662(a) accuracy-

related penalty with respect to the deduction of legal fees.    We

hold that it is not liable.

                        FINDINGS OF FACT

     At the time of the filing of the petitions, petitioners

Lenward C. Hood and Barbara P. Hood resided in Ft. Washington,

     1
       Petitioner Hood’s Institutional Foods, Inc. (HIF),
concedes that it is not entitled to a $2,442 deduction claimed in
1991 for vehicle expenses paid on behalf of Mrs. Hood and that
the resulting underpayment is subject to a sec. 6662(a) penalty.
Petitioners Lenward C. and Barbara P. Hood concede that their
taxable income should be increased by $1,206 in 1991 due to a
constructive dividend from HIF representing Mrs. Hood’s vehicle
expenses and that the resulting underpayment is subject to a sec.
6662(a) penalty.
                                - 4 -

Maryland, and petitioner HIF maintained its principal place of

business in the District of Columbia.

       From 1978 through June 30, 1988, Mr. Hood owned and operated

a sole proprietorship in the District of Columbia under the trade

name “Hood’s Institutional Foods”.      The sole proprietorship

engaged in the sale of food, paper and plastic goods, and related

products to institutional customers, primarily governmental

entities.    Mr. Hood incorporated HIF on May 3, 1988.    Commencing

July 1, 1988, through the time of trial, the business formerly

conducted by Mr. Hood as a sole proprietorship was conducted by

HIF.    Mr. Hood was, at all relevant times, the sole shareholder

of HIF.    Further, Mr. Hood supervised and managed all aspects of

the business conducted through the sole proprietorship and later

by HIF.    He was solely responsible for computing bid amounts,

negotiating bid amounts, and deciding whether or not to bid for

particular jobs.    His assistants made no important decisions

without consulting him.    When he took vacations, he spoke

frequently with his assistants by telephone.      In short, Mr. Hood

was indispensable to the continued successful operation of HIF.

       There was no written agreement executed by Mr. Hood and HIF

setting forth HIF’s assumption of the assets and liabilities of

the sole proprietorship.    However, HIF paid all of the sole

proprietorship’s accounts payable and received payment on the

sole proprietorship’s accounts receivable.      Mr. Hood caused the
                               - 5 -

bank account of the sole proprietorship to be transferred to the

name of HIF.2

     In November 1990, Mr. Hood was indicted on two counts of

criminal tax evasion under 26 U.S.C. sec. 7201 (1994) and two

related counts of criminal false declaration under 26 U.S.C. sec.

7206(1) (1994).   The allegations in the indictment related solely

to the operation of, and Schedule C reporting of income from, the

sole proprietorship for calendar years 1983 and 1984.   Neither

HIF nor Mrs. Hood was charged in the indictment.   After a jury

trial in May 1991, Mr. Hood was acquitted on all counts.   During

its taxable year ended June 30, 1991, HIF paid $103,187.91 in

legal fees incurred in Mr. Hood’s defense and deducted this

amount on its return for that year.    At the end of its June 30,

1991, taxable year, HIF had retained earnings of $247,593.    HIF

declared no dividends during that year.

     Prior to Mr. Hood’s indictment, respondent had issued a

notice of deficiency to Mr. and Mrs. Hood (not at issue in these

cases) in which respondent determined that there were

deficiencies and civil fraud additions to tax applicable in each

of the Hoods’ taxable years 1983 through 1986, based on the

operation of the sole proprietorship in those years.    After Mr.

Hood’s acquittal, Mr. and Mrs. Hood entered into a settlement

     2
       Previously, a substantial check had been drawn on this
account to cover a security deposit and certain conversion costs
for premises leased to HIF.
                              - 6 -

agreement with respondent in which it was agreed that Mr. and

Mrs. Hood were liable for deficiencies and civil fraud additions

to tax for, inter alia, tax years 1983 and 1984, the amount of

which was paid by Mr. Hood personally.3

     In separate statutory notices of deficiency issued to HIF

and to the Hoods, respondent determined that HIF was not entitled

to deduct the legal fees incurred during HIF’s taxable year ended

June 30, 1991, to defend Mr. Hood (i.e., $103,187.91) and that

Mr. and Mrs. Hood received a constructive dividend equal to the

legal fees paid by HIF during calendar year 1991; namely,

$86,279.

                             OPINION

     The central issue in these cases is whether HIF may deduct

the legal fees it paid for Mr. Hood’s defense against criminal

tax evasion and false declaration charges arising from Mr. Hood’s

reporting of the Schedule C, Profit or Loss From Business, income

of a predecessor sole proprietorship.     Respondent contends that

HIF may not deduct the legal fees because their payment

constitutes a constructive dividend to Mr. Hood and they

otherwise do not qualify as ordinary and necessary business

     3
       We take judicial notice of the stipulated decision of this
Court entered in the referenced case under which the Hoods agreed
they were liable for deficiencies and additions to tax totaling
$107,517 plus additional amounts computed as 50 percent of the
interest on $6,105, $27,530, and $63,817 for 1983, 1984, and
1985, respectively, and were due an overpayment of $28,350 for
1986.
                              - 7 -

expenses of HIF under section 162.4   Conversely, petitioners

contend that the legal fees are deductible by HIF as an ordinary

and necessary business expense and consequently are not a

constructive dividend to Mr. Hood.5   The parties base their

arguments primarily on Jack’s Maintenance Contractors, Inc. v.

Commissioner, T.C. Memo. 1981-349, revd. per curiam 703 F.2d 154

(5th Cir. 1983), a case in which this Court held in virtually

identical circumstances that the corporation was entitled to

deduct the legal fees but on appeal was reversed by the Court of

Appeals for the Fifth Circuit on the grounds that payment of the

legal fees constituted a constructive dividend to the

shareholder.

     The facts in Jack’s Maintenance Contractors, Inc. are not

materially distinguishable from the facts of the instant cases.

     4
       Respondent effectively concedes that the legal fees are
ordinary and necessary business expenses of Mr. Hood, having
taken the position at trial and on brief that, in the event it is
decided that HIF’s payment of the legal fees is a constructive
dividend to Mr. Hood, he is entitled to a sec. 162 deduction in
the amount of the fees included in his income.
     5
       Respondent determined that the legal fees constituted a
constructive dividend to Mr. Hood, and petitioners have not
argued that the payment constituted compensation to him,
deductible by HIF on that basis. In any event, when a
corporation makes a payment to an individual who is both an
employee and a shareholder, the payment must have been intended
as compensation when made in order to be deductible as such. See
Paula Constr. Co. v. Commissioner, 58 T.C. 1055 (1972), affd.
without published opinion 474 F.2d 1345 (5th Cir. 1973). On its
return, HIF deducted the legal fees on a separate schedule from
the amounts it paid as compensation to Mr. Hood.
                               - 8 -

Jack Farmer owned a sole proprietorship engaged in building

repair and construction contracting.   He incorporated Jack’s

Maintenance Contractors, Inc., which assumed the business of the

sole proprietorship.   He was president and sole shareholder of

the corporation and vital to its operations.    Three years after

incorporation, he and his spouse6 were indicted and tried for

criminal tax evasion and false declaration with respect to the

alleged failure to report income from the sole proprietorship

during years prior to incorporation.   The corporation paid the

legal expenses in defending the criminal charges against Mr. and

Mrs. Farmer, which were ultimately dismissed.

     In this Court’s opinion in Jack’s Maintenance Contractors,

Inc., we allowed the corporate taxpayer a deduction for the legal

expenses.   The Commissioner argued that under the “origin-of-the-

claim” test established in United States v. Gilmore, 372 U.S. 39

(1963), the legal fees were not deductible by the corporation.

We found, however, that the origin-of the-claim test in Gilmore

addressed only whether the legal fees were nondeductible

“personal” expenses or deductible “business” expenses.   We

     6
       Petitioners point out that Mrs. Hood was not indicted,
unlike the wife of the sole shareholder in Jack’s Maintenance
Contractors, Inc. v. Commissioner, T.C. Memo. 1981-349, revd. per
curiam 703 F.2d 154 (5th Cir. 1983). Thus, while the payment of
legal fees in Jack’s Maintenance Contractors, Inc. arguably
benefited the shareholder’s wife, it did not benefit Mrs. Hood in
the instant cases. In other words, there is arguably less
benefit to Mr. Hood than there was to the shareholder in Jack’s
Maintenance Contractors, Inc.
                               - 9 -

concluded (as the Commissioner had conceded) that the fees were

business rather than personal in origin and reasoned that the

“real issue” in the case was whether one taxpayer may deduct the

expenses of another.   Relying on the exception in Lohrke v.

Commissioner, 48 T.C. 679 (1967), to the general rule that a

taxpayer may not deduct the expenses of another, see Deputy v.

du Pont, 308 U.S. 488 (1940), we held that the legal fees were

deductible by the corporation because the corporation had a

sufficient business purpose in paying what were concededly the

expenses of another (its shareholder/employee, Farmer); namely,

ensuring its continued operations because Farmer was an

indispensable employee.   We further relied on Holdcroft Transp.

Co. v. Commissioner, 153 F.2d 323 (8th Cir. 1946), affg. a

Memorandum Opinion of this Court, in which a corporate successor

to a partnership was allowed to deduct legal fees with respect to

the settlement of outstanding claims against the parnership.    In

Jack’s Maintenance Contractors, Inc., the appropriate treatment

by Mr. Farmer of the legal fees was not before us, and we did not

address the question of whether the corporation’s payment of the

fees was a constructive dividend.

     The Court of Appeals reversed, holding that the fees were

not deductible by the corporation, on two grounds.   First, the

Court of Appeals held that the legal fees were not deductible

because they constituted a constructive dividend.    In finding a
                                - 10 -

constructive dividend, the Court of Appeals applied the test of

whether the payment primarily benefited the shareholder or the

corporation and concluded that the shareholder was the primary

beneficiary.   As a second ground, the Court of Appeals held that

in any event the legal fees were the personal expenses of the

shareholder and not an ordinary and necessary business expense of

the corporation.   The Court of Appeals analogized the legal

expenses to the shareholder’s medical expenses, both of which

were personal in its view, and concluded that any rule which

permitted a corporate deduction of a shareholder’s personal

expenses on the grounds that the corporation’s payment ensured

the continued availability of an indispensable employee “would be

far too broad”.    Jack’s Maintenance Contractors, Inc. v.

Commissioner, 703 F.2d 154, 157 (5th Cir. 1983), revg. per curiam

T.C. Memo. 1981-349.   The corporation’s deduction was therefore

disallowed.

     Respondent advances two arguments in connection with the

Jack’s Maintenance Contractors, Inc. case.     First, respondent

attempts to distinguish it from the instant cases by arguing that

Mr. Hood was not indispensable to HIF, unlike the shareholder in

Jack’s Maintenance Contractors, Inc.     We disagree, as our

findings of fact provide.   Mr. Hood was just as indispensable to

the business of HIF as Mr. Farmer was to the business of Jack’s

Maintenance Contractors, Inc.    Second, respondent asks us to
                             - 11 -

adopt the approach used by the Court of Appeals over the approach

used by this Court in Jack’s Maintenance Contractors, Inc.7

Petitioners, of course, believe that Jack’s Maintenance

Contractors, Inc. was decided correctly by this Court and urge us

to follow it.8

     Upon reconsideration of our opinion in Jack’s Maintenance

Contractors, Inc., and its reversal by the Court of Appeals, we

     7
       Respondent concedes that this Court is not bound by the
decision of the Court of Appeals for the Fifth Circuit, as the
appeals of the instant cases lie elsewhere. See Peat Oil & Gas
Associates v. Commissioner, 100 T.C. 271, 274 (1993), affd. sub
nom. Ferguson v. Commissioner, 29 F.3d 98 (2d Cir. 1994); Golsen
v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985
(10th Cir. 1971).
     8
       Petitioners also argue that HIF had a business purpose in
paying the legal fees because it was potentially liable, as a
transferee or successor of the sole proprietorship, for the
deficiencies and penalties resulting from the Hoods’ failure to
report income of the sole proprietorship.

     We believe HIF’s exposure to transferee liability was
insignificant. Petitioners’ reliance on Bingham v. Goldberg.
Marchesano. Kohlman. Inc., 637 A.2d 81, 89-90 (D.C. 1994), for
the proposition that HIF would have been liable under State law
as a transferee of the sole proprietorship as a “mere
continuation” is misplaced. That case makes clear that under
District of Columbia law transferee liability is not imposed
under the “mere continuation” standard where the predecessor
remains in existence, as is the case here with Mr. Hood.
Moreover, Mr. Hood was able to, and in fact did, pay the
deficiencies and additions to tax posited as the basis for HIF’s
purported transferee liability.

     In any event, any business purpose premised upon the
speculative possibility of HIF’s transferee liability pales in
comparison to the central business purpose argued in Jack’s
Maintenance Contractors, Inc. v. Commissioner, supra, and the
instant cases; namely, the benefit of staying in business.
                             - 12 -

do not believe that we gave sufficient consideration to the

possibility of a constructive dividend.   Nor do we think the

facts in that case or the instant cases come within the terms of

the exception in Lohrke v. Commissioner, supra, to the general

rule that a taxpayer may not deduct the expenses of another.    We

accordingly review these issues in the context of the instant

cases.

     Our conclusion in Jack’s Maintenance Contractors, Inc. v.

Commissioner, supra, relied in substantial part upon the holding

in Lohrke v. Commissioner, supra, that a taxpayer may deduct the

payment of the expenses of another if the motive in so doing is

to protect or promote the taxpayer’s business.    However, Lohrke,

as well as the cases on which it relied, involved the payment by

an individual of a corporation’s expenses.   Where a corporation

pays expenses incurred by its sole or controlling shareholder, as

in the instant cases, an additional issue not considered in

Lohrke is presented; namely, whether the corporation’s payment

should be treated as, in substance, a distribution of earnings.

Moreover, arrangements between a corporation and a controlling

shareholder should be closely scrutinized.   See Electric & Neon,

Inc. v. Commissioner, 56 T.C. 1324, 1339 (1971), affd. without

published opinion 496 F.2d 876 (5th Cir. 1974).   Accordingly, we

agree with the Court of Appeals that consideration should have

been given to whether there was a constructive dividend in Jack’s
                                - 13 -

Maintenance Contractors, Inc.9    In addition, we believe Lohrke is

further distinguishable from the situation in the instant cases

on the basis of the showing made by the taxpayer of the reasons

for paying another’s expense.    In Lohrke, the taxpayer paid the

expenses of another unable to do so; here, there has been no such

showing.

         A constructive dividend arises “Where a corporation confers

an economic benefit on a shareholder without the expectation of

repayment, * * * even though neither the corporation nor the

shareholder intended a dividend.”     Magnon v. Commissioner, 73

T.C. 980, 993-994 (1980).    There is no question that the payment

of Mr. Hood’s legal fees was an economic benefit conferred

without the expectation of repayment, raising the question of a

constructive dividend.    “However, ‘not every corporate

expenditure which incidentally confers economic benefit on a

shareholder is a constructive dividend.’    The crucial test of the

existence of a constructive dividend is whether ‘the distribution

was primarily for the benefit of the shareholder.’”     Id. at 994

(quoting Loftin & Woodard, Inc. v. United States, 577 F.2d 1206,

1214 (5th Cir. 1978)).    The existence of some benefit to the

corporation is not enough to permit a corporate deduction; the

     9
       In the instant cases, unlike Jack’s Maintenance
Contractors, Inc. v. Commissioner, supra, we have before us both
the issue of the corporation’s entitlement to a deduction and the
shareholder’s receipt of income arising from the corporation’s
payment of the legal expenses.
                              - 14 -

Court must weigh the benefit to the shareholder and the

corporation, and “where the business justifications put forward

are not of sufficient substance to disturb a conclusion that the

distribution was primarily for shareholder benefit,” a

constructive dividend will be found.    Sammons v. Commissioner,

472 F.2d 449, 452 (5th Cir. 1972), affg. on this issue and revg.

and remanding on another issue T.C. Memo. 1971-145.   The

determination of whether the shareholder or the corporation

primarily benefits is a question of fact, see id., and “The line

between primarily for shareholder benefit and primarily for

corporate benefit is often a difficult one to draw”, Crosby v.

United States, 496 F.2d 1384, 1389 (5th Cir. 1974).

     As for the showing that a taxpayer must make in order to

deduct the expenses of another, we note that in Lohrke v.

Commissioner, 48 T.C. 679 (1967), the taxpayer had shown that the

expenses he paid to protect his own business were those of a

corporation unable to make payment.    The taxpayer in Lohrke held

a majority interest in a corporation that had provided defective

synthetic fiber to a customer.   The taxpayer individually carried

on a separate trade or business of licensing the process to

produce the synthetic fiber, from which he derived substantial

royalty income.   The customer suffered losses as a result of

receiving the defective fiber, but the corporation, which was in

serious financial difficulty, was unable to compensate the
                              - 15 -

customer.   Because the corporation was unable to pay, the

taxpayer guaranteed, and ultimately paid, the customer’s losses

because he was concerned that otherwise his reputation in the

industry, and that of his patented process, would be damaged.     We

held that an exception existed to the general rule that a

taxpayer may not deduct the expenses of another.   The cases

relied on in Lohrke likewise involved the taxpayers’ payment of

the obligations of others in financial difficulty.   See, e.g.,

Lutz v. Commissioner, 282 F.2d 614 (5th Cir. 1960), revg. and

remanding T.C. Memo. 1959-32; Pepper v. Commissioner, 36 T.C. 886

(1961); Snow v. Commissioner, 31 T.C. 585 (1958); Dinardo v.

Commissioner, 22 T.C. 430 (1954).   Thus, under the Lohrke line of

cases, the adverse consequences for the payor taxpayer’s business

must be direct and proximate, as is demonstrated in these cases

by the impact on a payor’s business of an obligor’s inability to

meet his obligations.   See also AMW Invs., Inc. v. Commissioner,

T.C. Memo. 1996-235 (adverse effect on payor’s business must be

“clear, direct, and proximate”); Concord Instruments Corp. v.

Commissioner, T.C. Memo. 1994-248 (same).

     The “primary benefit” test for a constructive dividend and

the standards under which a taxpayer may deduct the expenses of

another both indicate that the showing a corporation must make to

deduct the expenses of its shareholder is a strong one.   To avoid

constructive dividend treatment, the taxpayer must show that the
                                - 16 -

corporation primarily benefited from the payment of the

shareholder’s expenses.    We do not believe petitioners have shown

that HIF primarily benefited from the payment of Mr. Hood’s legal

expenses.   In these cases, there is no evidence that, in deciding

to pay the legal fees, genuine consideration was given to the

corporate interests identified by petitioners; namely, loss of an

indispensable employee if his legal expenses were not paid.       To

the contrary, it does not appear that HIF’s failure to pay the

legal fees would have caused it to go out of business.     Mr. Hood

in fact paid the deficiencies and civil fraud additions to tax

arising from the years for which he was indicted as well as 1985,

strongly suggesting that he had the wherewithal to pay the legal

fees associated with his criminal defense.    Certainly there was

no showing that he could not.    The evidence does not show that

HIF would have ceased operations if it did not pay the legal

fees, casting doubt on the claim that the primary purpose of the

expenditure was to forestall this result.    The benefits to Mr.

Hood are obvious: free legal representation for which he would

otherwise have to pay to avoid incarceration and/or a felony

conviction.    In these circumstances, “the business justifications

put forward are not of sufficient substance to disturb a

conclusion that the distribution was primarily for shareholder

benefit”.     Sammons v. Commissioner, supra at 452.   On these
                              - 17 -

facts, we hold that Mr. Hood, not HIF, was the primary

beneficiary of the payment of his legal fees.

     For similar reasons, we conclude that petitioners have not

shown conditions sufficient to permit HIF to deduct the expenses

of another, under the standards of Lohrke v. Commissioner, supra,

and like cases.   Petitioners have not shown that Mr. Hood was

experiencing financial difficulty or was otherwise unable to pay

his legal fees.   Thus, while the incarceration of Mr. Hood might

have caused HIF to cease operations, petitioners have not shown

that HIF’s failure to pay the legal fees would have led to Mr.

Hood’s incarceration.   The benefits to HIF’s business of paying

Mr. Hood’s legal fees are not as direct and proximate as the

connection demonstrated in Lohrke, where the corporation’s

inability to compensate purchasers of its defective fabric

prompted its shareholder, who collected royalties from the

fabric’s production process, to make the compensatory payments.

     Finally, our opinion in Jack’s Maintenance Contractors, Inc.

v. Commissioner, supra, also relied upon the holding in Holdcroft

Transp. Co. v. Commissioner, 153 F.2d 323 (8th Cir. 1946), that a

corporation could deduct legal fees paid in connection with

resolving a liability transferred to it by a predecessor

partnership in a section 351 transaction.   Upon reconsideration,

we believe Holdcroft Transp. Co. is distinguishable.     In that

case, the liabilities were explicitly assumed by the corporation
                             - 18 -

and were the subject of litigation pending against the

predecessor partnership at the time of the transfer.10   The legal

fees were specifically incurred by the successor corporation for

the purpose of defending its interests in the pending litigation.

In the instant cases, HIF did not retain legal counsel to defend

its interests in the criminal proceedings against Mr. Hood; HIF

was not indicted.

     For the foregoing reasons, we hold that HIF’s payment of the

legal fees was a constructive dividend, not deductible by HIF

during its 1991 taxable year, and taxable to Mr. Hood as a

dividend to the extent paid during calendar year 1991.11     We

hold further that HIF is not entitled to a deduction for the

legal fees it paid because they were the expenses of another, and

HIF has not shown that the payment was made to protect or promote

     10
       In these cases, petitioners have not argued reliance on
respondent’s positions announced in Rev. Rul. 95-74, 1995-2 C.B.
36; Rev. Rul. 83-155, 1983-2 C.B. 38; or Rev. Rul. 80-198, 1980-2
C.B. 113. In those rulings, respondent permitted transferee
corporations to deduct certain liabilities, including contingent
liabilities, transferred from predecessors in sec. 351
transactions in various circumstances.
     11
       HIF had earnings and profits well in excess of the amount
of the legal fees paid, and petitioners have not disputed that
the payment was made out of earnings and profits. See secs.
301(a), (c), 316(a).
                                - 19 -

its own trade or business, under the standards of Lohrke v.

Commissioner, supra, and similar cases.12

       The remaining issue for consideration is whether HIF is

liable for the accuracy-related penalty under section 6662(a) and

(b)(1) (negligence or disregard of rules or regulations) with

respect to the claimed deduction for the payment of legal fees.

The term “negligence” includes any failure to make a reasonable

attempt to comply with the Internal Revenue Code, and the term

“disregard” includes any careless, reckless, or intentional

disregard.    Sec. 6662(c).   Given that HIF’s reporting position

was consistent with our holding in Jack’s Maintenance

Contractors, Inc. v. Commissioner, supra, we find there was no

negligence or disregard of rules or regulations on the part of

HIF.

       To reflect the foregoing,

                                           Decisions will be entered

                                   under Rule 155.

       Reviewed by the Court.

     WELLS, CHABOT, COHEN, PARR, RUWE, WHALEN, COLVIN, HALPERN,
BEGHE, CHIECHI, FOLEY, VASQUEZ, THORNTON, and MARVEL, JJ., agree
with this opinion.

       LARO, J., concurs in result only.

       12
       Because we conclude that petitioner HIF does not come
within the terms of the exception provided in Lohrke v.
Commissioner, 48 T.C. 679 (1967), we do not consider the impact
of the origin-of-the-claim doctrine announced in United States v.
Gilmore, 372 U.S. 39 (1963), on the deduction of the legal
expenses of another by a taxpayer meeting the terms of the
exception provided in Lohrke.