Jack's Maintenance Contractors, Inc. v. Commissioner of Internal Revenue

This case involves the deductibility by the taxpayer, Jack’s Maintenance Contractors, Inc., of legal fees paid for its sole shareholder’s defense against criminal tax evasion charges. The Tax Court found that the taxpayer could deduct the fees as ordinary and necessary business expenses. Because we find that the payments were constructive dividends to the shareholder, and further that they were not ordinary and necessary expenses of the taxpayer, we reverse.

I. FACTUAL AND PROCEDURAL BACKGROUND.

The facts of this case as found by the Tax Court are uncontested. For a number of years, Jack Farmer…