Cavanaugh v. Comr., T.C. Memo. 2012-324

(petitioner founded an S corporation that provided janitorial services; petitioner and employees along with petitioner’s girlfriend vacationed at exotic location where girlfriend died of cocaine overdose; decedent’s mother sued petitioner and employees on basis that they provided drugs that caused death; S corporation paid approximately $2.3 million (including $250,000 paid by petitioner for which he is reimbursed by S corporation; S corporation claims $180,000 deduction for legal fees associated with settling claims; amount not deductible because it did not arise out of business operations of S corporation; merely naming S corporation as defendant does not make legal fees or settlement costs deductible business expenses; petitioner stipulated that trip was not a business trip; evidence did not support constructive dividend treatment of $250,000 reimbursement to petitioner).