                        T.C. Memo. 1996-233



                      UNITED STATES TAX COURT



     DAVID A. STURMAN AND CELINDA M. STURMAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10024-95.                     Filed May 22, 1996.



     F. Richard Losey and Daniel J. Leer, for petitioners.

     Debra K. Estrem, for respondent.



                        MEMORANDUM OPINION


     LARO, Judge:   Petitioners move for summary adjudication in

their favor, arguing that res judicata disposes of this case.

Petitioners support their motion with two affidavits (with

attached exhibits), as well as a memorandum of law.   Petitioners’

affiants are:   (1) David A. Sturman, one of petitioners herein
                                - 2 -

and the sole shareholder of Inter-Regional Service Corp.

(Corporation), and (2) Harlan Sharpers, Corporation’s director.

Respondent objects to petitioners’ motion, arguing primarily that

a genuine issue of fact exists as to the applicability of res

judicata.   Respondent supports her objection with two affidavits,

one of which has attached exhibits, and a memorandum of law.

Respondent’s affiants are:   (1) Jerry Li, Associate Chief of

Appeals, Internal Revenue Service, in San Francisco, California,

and (2) Debra K. Estrem, respondent’s counsel herein.

     We agree with respondent that this case is not ripe for

summary adjudication due to differences in opinion as to material

facts, and we shall deny petitioners’ motion.

                             Background1

     Corporation was incorporated in the State of California on

October 24, 1983, and Mr. Sturman is its only shareholder.       Since

its incorporation, Corporation has been engaged in the adult

entertainment industry.   It owns and services arcade machines

that it places in adult book stores.       At all relevant times,

Mr. Sturman was Corporation’s general manager and chief executive

officer.    Mr. Sturman was indicted by a Federal grand jury in

1986.    In relevant part, the indictment charged that he had

     1
       The “facts” presented in this Opinion are stated solely
for purposes of deciding the motion and are not findings of
fact for this case. Fed. R. Civ. P. 52(a); Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965
(7th Cir. 1994). When they petitioned the Court, petitioners
resided in Hillsborough, California.
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conspired to hamper, hinder, and impede the ascertaining,

computation, assessment, and collection of his father’s Federal

income taxes.

     In its taxable year ended June 30, 1990 (the 1989 taxable

year), Corporation incurred and paid $137,744 in legal fees and

$11,642 in travel-related expenses defending the criminal action.

On its 1989 Federal income tax return, Corporation deducted the

former amount as “legal expenses” and the latter amount as

“travel and entertainment”.   Corporation paid $41,671 and

$163,753 in legal fees during its 1990 and 1991 taxable years,

respectively, defending the criminal action.   Corporation

deducted these amounts as “legal expenses” on its 1990 and 1991

Federal income tax returns.

     In 1993, the Commissioner audited Corporation’s 1989, 1990,

and 1991 Federal income tax returns.   The Commissioner disallowed

the above-mentioned deductions taken by Corporation, and she

issued Corporation a notice of deficiency reflecting her

disallowance. According to the notice of deficiency, which was

dated April 4, 1994, Corporation could not deduct these amounts

because:   (1) The underlying expenses were not “directly or

proximately related to the corporation’s trade or business”,

(2) “the source of the criminal charges or the character of the

conduct from which the charges arise determines the deductibility

or nondeductibility of the legal expenses in question”, and

(3) the legal expenses were incurred by Mr. Sturman and
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indemnified by Corporation in connection with the personal

Federal income tax returns of him and his father, rather than the

returns of Corporation.

     Corporation petitioned the Court with respect to the notice

of deficiency, alleging that it could deduct the subject expenses

as employee compensation.    The Commissioner transferred the case

to her Appeals office for their development, and that office

eventually settled the case without trial.   On January 9, 1995,

the Court entered a stipulated decision that allowed Corporation

to deduct the subject expenses.

     On March 16, 1995, the respondent issued a notice of

deficiency to petitioners.   In relevant part, this notice

reflected the respondent’s determination that:   (1) The $149,386

of expenses deducted by Corporation on its 1989 tax return

($137,744 + $11,642) was constructive dividends to Mr. Sturman in

1990, and (2) the $205,424 of expenses deducted by Corporation on

its 1990 and 1991 Federal income tax returns ($41,671 + $163,753)

was constructive dividends to Mr. Sturman in 1991.   In her

answer, respondent asserted alternatively that the amounts

deducted by Corporation were “in the nature of salary or other

compensation” paid on behalf of Mr. Sturman, and that Mr. Sturman

was not entitled to a deduction with respect thereto because the

underlying expenses were personal.

                             Discussion
                               - 5 -

     Summary adjudication is intended to expedite litigation and

avoid unnecessary and expensive trials of phantom factual issues.

Kroh v. Commissioner, 98 T.C. 383, 390 (1992); Shiosaki v.

Commissioner, 61 T.C. 861, 862 (1974).   A decision on the merits

of a taxpayer's claim can be made by way of summary adjudication

"if the pleadings, answers to interrogatories, depositions,

admissions, and any other acceptable materials, together with the

affidavits, if any, show there is no genuine issue as to any

material fact and that a decision may be rendered as a matter of

law."   Tax Court Rules of Practice and Procedure Rule 121(b).

Because summary adjudication decides an issue against a party

before trial, we grant such a remedy cautiously and sparingly,

and only after carefully ascertaining that the moving party has

met all the requirements for summary adjudication.   Associated

Press v. United States, 326 U.S. 1, 6 (1945); Espinoza v.

Commissioner, 78 T.C. 412, 416 (1982).

     The Court will not resolve disagreements over material

factual issues through summary adjudication.   Espinoza v.

Commissioner, supra at 416.   The burden of proving that there is

no genuine issue of material fact is on the moving party, and

factual inferences are viewed in the light most favorable to the

nonmoving party.   United States v. Diebold, Inc., 369 U.S. 654,

655 (1962); Kroh v. Commissioner, supra at 390.   A fact is

material if it "tends to resolve any of the issues that have been
                                - 6 -

properly raised by the parties."    10A Wright et al., Federal

Practice and Procedure:    Civil, sec. 2725, at 93 (2d ed. 1983).

     Res judicata requires that the parties and their privies to

a prior action that has resulted in a final decision on the

merits be bound as to all issues that were or might have been

decided in that action.    Commissioner v. Sunnen, 333 U.S. 591,

597 (1948).   Res judicata applies in tax cases, United States v.

International Bldg. Co., 345 U.S. 502, 506 (1953), and a

stipulated decision is a judgment on the merits for purposes of

applying res judicata, Pert v. Commissioner, 105 T.C. 370 (1996).

     Petitioners ask us to hold that res judicata mandates that

the amount of the subject deductions was not income to

Mr. Sturman as a matter of law based on the stipulated decision

in Corporation’s case.    This we cannot do.   The parties disagree

on the breadth of the stipulated decision.     Petitioners’ affiants

allege that the Commissioner allowed Corporation to deduct the

subject expenses as corporate legal fees.      Respondent’s affiants

allege that the Commissioner allowed Corporation to deduct the

expenses as payments to Mr. Sturman in lieu of salary or other

compensation.   Petitioners’ affiants allege that the criminal

action was related to Corporation.      Respondent’s affiants allege

that the criminal action was unrelated to Corporation.     The

resolution of these conflicting allegations presents a question

of fact that must be decided by the Court as the trier of fact.

See Commissioner v. Heininger, 320 U.S. 467, 473 (1943).      The
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value of a trial with complete opportunity to view the demeanor

of the witnesses and each party’s evidence is obvious.       See

Hoeme v. Commissioner, 63 T.C. 18, 20 (1974).

     To reflect the foregoing,



                                              An appropriate order

                                         denying petitioners’ motion

                                         for summary judgment will be

                                         issued.
