Maxwell v. Commissioner

95 T.C. 107 (1990)

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Maxwell v. Commissioner

United States Tax Court
95 T.C. 107 (1990)

Facts

Peter and Helen Maxwell (plaintiffs) organized Hi Life Products, Inc. (plaintiff), a manufacturer of urethane-foam padding. Peter acted as president and general manager of operations. Helen acted as executive vice president, secretary, and treasurer. Peter and Helen each owned a 47.5 percent interest in the company. Alan and Marlene Sadler owned the remaining shares. All four served as officers, and in that capacity, they agreed to exclude themselves from state workers’-compensation coverage to reduce premiums. In 1977 Peter was seriously injured in an accident with a Hi Life mixing machine, after which he did not return to work for several weeks. Peter consulted with Hi Life’s corporate attorney, Floyd Brown, about the possibility of filing a personal-injury claim against the company. Brown indicated that such a possibility existed but advised Peter to seek outside counsel. Peter then retained the services of an outside attorney, Tristan Pico, who sent Brown a letter demanding that Hi Life pay Peter $125,000 in settlement of the claim. In a meeting from which Peter excused himself as a director, Hi Life agreed to settle the claim for $122,500. This settlement was paid and deducted by Hi Life as an expense. Peter and Helen did not report the $122,500 as gross income. The Commissioner of Internal Revenue (the commissioner) (defendant) determined that the settlement payment was really a disguised dividend and therefore nondeductible. The commissioner also determined that the payment should be added to Peter’s taxable income for 1977. Peter and Hi Life petitioned the United States Tax Court for a redetermination.

Rule of Law

Issue

Holding and Reasoning (Ruwe, J.)

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