UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

SARA FLOYD POWELL,
Plaintiff-Appellee,

v.

JOHN F. FLOYD; GORDON FARMS,
INCORPORATED; MULLIKAN VAULT
COMPANY,                         No. 97-2686
Defendants-Appellants,

and

RICHARD GORDON FLOYD; LOUISE
CAMPBELL,
Intervenors-Defendants.

SARA FLOYD POWELL,
Plaintiff-Appellant,

v.

JOHN F. FLOYD; GORDON FARMS,
INCORPORATED; MULLIKAN VAULT
COMPANY,                         No. 97-2748
Defendants-Appellees,

and

RICHARD GORDON FLOYD; LOUISE
CAMPBELL,
Intervenors-Defendants.
SARA FLOYD POWELL,
Plaintiff-Appellee,

v.

JOHN F. FLOYD; GORDON FARMS,
INCORPORATED; MULLIKAN VAULT
COMPANY,                                              No. 98-1382
Defendants-Appellants,

and

RICHARD GORDON FLOYD; LOUISE
CAMPBELL,
Intervenors-Defendants.

SARA FLOYD POWELL,
Plaintiff-Appellant,

v.

JOHN F. FLOYD; GORDON FARMS,
INCORPORATED; MULLIKAN VAULT
COMPANY,                                              No. 98-1429
Defendants-Appellees,

and

RICHARD GORDON FLOYD; LOUISE
CAMPBELL,
Intervenors-Defendants.

Appeals from the United States District Court
for the District of South Carolina, at Spartanburg.
William M. Catoe, Jr., Magistrate Judge.
(CA-96-2063-7-20AK)

Argued: May 7, 1999

Decided: October 12, 1999

                    2
Before MURNAGHAN and LUTTIG, Circuit Judges, and
WILLIAMS, Senior United States District Judge for the Eastern
District of Virginia, sitting by designation.

_________________________________________________________________

Affirmed in part and reversed in part by unpublished per curiam opin-
ion.

_________________________________________________________________

COUNSEL

ARGUED: Robert L. Widener, MCNAIR LAW FIRM, P.A., Colum-
bia, South Carolina, for Appellants. David Lynn Freeman, WYCHE,
BURGESS, FREEMAN & PARHAM, P.A., Greenville, South Caro-
lina, for Appellee. ON BRIEF: Charles Porter, Celeste T. Jones,
MCNAIR LAW FIRM, P.A., Columbia, South Carolina, for Appel-
lants. Gregory J. English, WYCHE, BURGESS, FREEMAN &
PARHAM, P.A., Greenville, South Carolina, for Appellee.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

John Floyd, the majority stockholder in two closely held, family
owned corporations, appeals from a judgment ordering him to pur-
chase his sister's (Sarah Floyd Powell's) shares at a price exceeding
$2,000,000.1 Floyd lodges three major objections to the magistrate
_________________________________________________________________
1 Pursuant to a partial settlement agreement, Floyd has paid more than
$1,000,000 of the judgment amount, and the parties are now litigating
over the remaining money in the instant appeal.

                    3
judge's decision:2 (1) the magistrate judge erred in refusing to allow
Floyd to reduce the amount paid to Powell by the amount of money
he would owe in capital gains taxes if he had otherwise disposed of
the stock; (2) the magistrate judge erred in declining to apply the doc-
trines of laches and unclean hands; and (3) the magistrate judge erred
in awarding Powell her attorney's fees. For her part, Powell raises
several challenges, which principally include the refusal to calculate
her attorney's fee award and director's fees as expenses to be
deducted from the derivative award in determining the taxes on that
award.

I.

John Gordon Floyd ("John"), the father of Floyd and Powell,
started Gordon Farms, a corporation organized under subchapter C of
the Internal Revenue Code,3 in 1959. John also created Mullikan4
Vault, a corporation organized under subchapter"S" of the Internal
Revenue Code.5 After John's death in 1969, Floyd, Powell and their
brother Richard Floyd ("Richard") each inherited a one-third share of
the corporations. In addition to giving the corporations to his children,
John's estate created two testamentary trusts for his wife's (Louise
Floyd Campbell's) benefit.

In 1976, the family asked Floyd to leave graduate school and man-
age the corporations. He has managed them ever since. In 1982, Gor-
don Farms' board of directors6 decided to pay Floyd a combined
compensation package of $70,000. Powell was to receive $15,000 per
year in director's fees. That same year, the board approved a $4,000
per month payment to Louise. Louise later resigned from the board.
_________________________________________________________________
2 The parties consented to the disposition of this diversity matter by the
magistrate court pursuant to 28 U.S.C. § 636(c)(1) (1994).
3 See 26 U.S.C. §§ 301-386 (1994).
4 In some of the corporation's financial statements and internal docu-
ments, its name is spelled "Mullikin." However, in the briefs presented
to the court, the name is spelled "Mullikan." Throughout the opinion
here, we will use the latter spelling.
5 See 26 U.S.C. §§ 1361-1379 (1994).
6 Apparently, the same individuals served on Mullikan Vault's board as
well.

                    4
Powell and Richard, as members of the board of directors, helped
Floyd manage the corporations into the early 1990's. In 1992, how-
ever, Richard sold his interests to Floyd for $1,140,000. Floyd agreed
to repay Richard with annual installment payments of $100,000 for
thirty years. As a result of the sale, Floyd owned two-thirds of the
stock in each corporation, and Powell owned one-third of the stock.

After John's death, the corporations suffered from mismanage-
ment. In the early 1970's, before Floyd began managing the corpora-
tions, Gordon Farms had financial trouble. It borrowed $631,477 from
one of the testamentary trusts and still owed that trust more than
$585,000 at the beginning of the litigation.

Floyd's tenure as president has been marked by internal disarray.
Only one shareholders' meeting has been held since 1987.7 Many of
the records of important votes and transactions are incomplete or non-
existent. While the corporations have not become insolvent, the mag-
istrate court found that Mullikan Vault had no value.

Moreover, Floyd often took advantage of his position as president
of the corporations. Floyd's salary increased from $70,000 to $90,000
in 1988, although there were neither board meetings held to vote on
the matter nor any other sign of approval by the board or shareholders.8
Similarly, he was paid $140,000 in 1994 and 1996, although there are
no records of votes approving the salary increase. Despite his agree-
ment in 1979 to draw no salary from Mullikan Vault, Floyd drew a
salary from that corporation in 1995 and 1996. In 1995, Floyd drew
$11,677 in salary and $12,000 in management fees. In 1996, he was
paid a $28,000 salary. As with his other salary increases, no records
show the board's or shareholders' approval.

Floyd also caused the corporations to expend funds for his personal
endeavors. In 1977, the board agreed to pay Floyd's membership dues
_________________________________________________________________
7 Powell was elected treasurer at the 1987 meeting. The other meeting
took place in January 1993.
8 Under South Carolina law, the board is not required to hold formal
meetings before making decisions, particularly where the directors own
all of the stock and are cooperating with each other. See Alderman v.
Alderman, 181 S.E. 897, 906 (S.C. 1935).

                    5
in three local clubs and to provide him with an automobile.9 However,
since 1986, the corporations have paid for far more than that. Gordon
Farms' records show that it purchased a vehicle for one of Floyd's
sons, made approximately $66,000 in payments on Floyd's yacht,
donated several more thousands to charities that Floyd supports, paid
for Floyd's medical bills and other miscellaneous expenses. More-
over, Floyd borrowed approximately $440,000 from Gordon Farms.
At trial, Floyd could not produce any documentary or other evidence
that those expenditures were approved by the board or the sharehold-
ers.

In the meantime, Powell had considered suing Floyd several times.
She believed that as early as 1990, Floyd was attempting to "squeeze"
her out. She thought that Floyd intentionally failed to share important
information about the companies' operation with her, such as plans
for developing some of Gordon Farms' property. Thus, in 1993, she
hired an accountant to perform a comprehensive review of both cor-
porations' records. That review revealed some -- but not all -- of the
conduct at issue in the instant litigation. Powell claimed that she
chose not to sue immediately out of respect for her family and a
desire not to disrupt the family businesses.

Powell then sought to negotiate a settlement with Floyd that would
permit her to exit the company. After negotiations failed, she filed the
instant lawsuit. She sought dissolution of the corporations, or, alterna-
tively, a buyout of her shares. In particular, Powell sought an arrange-
ment that would give her a portion of the companies' real estate and
would not result in any tax liability for her. After a trial held March
31 - April 3, 1997, a magistrate judge concluded that Floyd had
breached his fiduciary duties to the corporations and ordered Floyd to
reimburse them for his excessive expenditures. The judge also
ordered Floyd to buy Powell's shares. The judge then ordered the par-
ties to structure the buyout. On January 21, 1998, after months of con-
tentious negotiations and various motions, the magistrate judge set the
buyout at $2,331,675.00. Both parties appeal.
_________________________________________________________________
9 The clubs are the Sertoma Club, the Piedmont Club, and the Country
Club of Spartanburg. Gordon Farms' records also show that it purchased
a 1994 Ford Explorer for $27,000 for Floyd's use.

                    6
II.

As the instant case is a diversity matter -- Powell is a North Caro-
lina resident while Floyd and the corporations are South Carolina resi-
dents -- the rule of Erie v. Tompkins, 304 U.S. 64, 78 (1938),
requires us to apply South Carolina law.

Floyd first complains that the magistrate judge erred in refusing to
deduct from the net asset value an amount equal to the amount the
corporation would have to pay in capital gains taxes if it were liqui-
dated or otherwise transferred.10 He contends that because the taxes
will eventually have to be paid, any valuation should consider them.
He further contends that the changes occurring in the Tax Code in
1986 support such deductions as well. On the other hand, Powell con-
tends that Floyd waived the argument by failing to present it at the
initial hearing.

We conclude that Floyd did not waive the argument. While parties
generally waive an argument when they fail to raise it in a timely
manner, a trial court's exercise of its discretion to hear the argument
anyway may preserve it for appellate review. See Holland v. Big
River Minerals Corp., ___ F.3d ___, 1999 WL 417472 at *6 (4th Cir.
June 23, 1999). Here, the magistrate judge noted that Floyd did not
raise this particular tax issue at trial, but considered the argument after
the trial. Since the trial court decided to hear Floyd's argument, Floyd
has preserved the issue for our review.

That said, Floyd's argument is unavailing. Floyd principally relies
on the recent Second Circuit case Eisenberg v. Commissioner of
Internal Revenue, 155 F.3d 50, 53 (2d Cir. 1998). In that case, the
sole shareholder in a corporation decided to give her children her
shares in that corporation. Before making the gift, Eisenberg deducted
the capital gains taxes as they would have been paid if the company
were being liquidated or otherwise transferred. See id. at 52. The tax
court concluded that the deductions were improper. See id.
_________________________________________________________________
10 The issue Floyd raises here is an issue of law, which we review de
novo. See St. Paul Fire & Marine Ins. Co. , 86 F.3d 332, 334 (4th Cir.
1996).

                     7
However, the Second Circuit reversed, holding that the rationale
for prohibiting that deduction was the General Utilities doctrine,
under which C-Corporations were not taxed on unrealized gain.11 See
id. at 54. Congress has abrogated that doctrine. See Tax Reform Act
of 1986, Pub. L. No. 99-514, § 631, 100 Stat. 2085, 2269 (codified
as amended in scattered sections of 26 U.S.C.). Because of that abro-
gation, the Second Circuit held that the deduction was appropriate
because Eisenberg's corporation no longer could avoid taxation at the
corporate level. See Eisenberg, 155 F.3d at 56.

Although Congress has abrogated the General Utilities doctrine,
Floyd will not prevail. That Gordon Farms eventually must recognize
the gain does not necessarily require that Floyd deduct the taxes
before providing a final valuation of Powell's shares. The Eisenberg
court noted that gain recognition can be deferred indefinitely where
the corporation retains its property and continues leasing it to third
parties.12 See 155 F.3d at 56, n.14. That is precisely what Floyd was
attempting to do with the tracts of land Gordon Farms owns. To the
extent that the recognition can be deferred, we should not effectively
impose the tax burden on Powell.13
_________________________________________________________________

11 As the court notes, the Supreme Court held in General Utilities &
Operating Co. v. Helvering, 296 U.S. 200, 206 (1935), that corporations
did not recognize gains on distributions of appreciated property. See
Eisenberg, 155 F.3d at 54. As a result of the holding in General Utilities,
courts disapproved corporate attempts to take a capital gains deduction
when valuing their shares because corporations could avoid taxation alto-
gether by simply liquidating and distributing their assets. See Eisenberg,
155 F.3d at 54.
12 Indeed, the corporation at issue in that case also leased its property
to third parties. See 155 F.3d at 52. The court simply concluded, without
citation to authority, that because the taxes eventually must be paid, they
were not sufficiently speculative to avoid consideration. We simply dis-
agree with that assessment where the corporation not only will not be liq-
uidated in the foreseeable future, but also can defer the recognition of the
gain indefinitely. Moreover, the particular facts of this case only rein-
force that view.
13 Essentially, the issue here boils down to who will bear the tax bur-
den. That is, our holding simply leaves the tax burden on the corporation
to pay when it finally must recognize the gain.

                    8
Floyd next complains that the magistrate judge should have applied
the doctrines of laches and unclean hands to dispose of Powell's
claims. He points to Powell's previous complaints about some of the
activities at the heart of the instant action as evidence that Powell
should have sued earlier than she did. Moreover, he argues that her
occasional use of corporate property renders her hands "unclean."
Since actions brought under S.C. Code Ann. § 33-14-300 to dissolve
corporations are equitable, see McDuffie v. O'Neal, 476 S.E.2d 702,
708 (S.C. App. 1996), equitable doctrines such as those advanced by
Floyd may bar Powell's recovery.

Floyd first contends that the laches doctrine should bar Powell's
recovery. The laches defense is grounded in the maxim that "[e]quity
aids the vigilant, not those who slumber on their rights." Hemingway
v. Mention, 89 S.E.2d 369, 372 (S.C. 1955) (citation omitted). It
applies where the plaintiff unreasonably delays the pursuit of his or
her rights and the defendant is injured or prejudiced thereby. See
Gibbs v. Kimbrell, 428 S.E.2d 725, 730 (S.C. App. 1993). It is a fact-
sensitive inquiry, and, in South Carolina, is generally left to the trial
court's discretion. See id. Likewise, we review the decision to apply
the doctrine for an abuse of that discretion. See Skippy, Inc. v. CPC
Int'l, Inc., 674 F.2d 209, 212 (4th Cir. 1982).

Although Powell had general awareness of some of the activities
giving rise to the claims she asserts, the magistrate judge did not
abuse his discretion in declining to apply laches. First, Powell's delay
was caused, in some part, by her desire to negotiate an exit from the
corporations rather than bring suit. She decided to sue only after the
negotiations dissolved. Thus, she was not sleeping on her rights but
only trying to protect them without litigation. Second, in addition to
the instances of self-dealing Powell learned about through the 1993
audit, Floyd engaged in other wrongful practices that Powell knew
nothing about until the instant litigation. For example, Powell's 1993
audit would not have revealed the salaries Floyd drew from Mullikan
Vault in 1995 and 1996, the plans for development in 1995 that Pow-
ell learned about through newspaper accounts well after the negotia-
tions or the extent to which Floyd used corporate funds to supply his
children with cars and other amenities. As a result, we cannot con-
clude that Powell unreasonably delayed filing her claims.

                     9
Even if Powell did delay in filing her claims, the laches defense
still does not bar them here. Delay alone is insufficient to prevail on
a laches defense. See Gibbs v. Kimbrell, 428 S.E.2d 725, 730 (S.C.
App. 1993). Rather, the defendant must suffer some prejudice in order
to bar the plaintiff's claim. See id. A defendant has not been preju-
diced by the delay if the delay merely has permitted him to enjoy a
wrongfully obtained benefit for a longer period of time. See Provident
Life and Accident Ins. Co. v. Driver, 451 S.E.2d 924, 929 (S.C. App.
1994). Here, the only "prejudice" to Floyd was that he continued to
misuse corporate funds for his benefit for a longer period of time.
Because that is insufficient injury to constitute prejudice, the laches
defense does not apply.

Floyd's unclean hands argument is unavailing and merits little dis-
cussion. That doctrine is rooted in the time-honored maxim that "he
who seeks equity should come with clean hands." See Hemingway v.
Mention, 89 S.E. 2d 369, 372 (S.C. 1955). Thus, a plaintiff who has
engaged in wrongdoing or impropriety in the transaction giving rise
to the litigation cannot avail herself of equitable relief. See Wilson v.
Landstrom, 315 S.E.2d 130, 134 (S.C. App. 1984).

The magistrate judge did not err in refusing to preclude Powell
from obtaining relief. The record shows that any misappropriations on
Powell's part were minor in scope. For example, Floyd complains that
Powell approved some of the political donations and even helped
make one of them. The record shows that she did approve of one such
donation. Proof of approval of a single political donation is insuffi-
cient to establish that she approved of all such donations made. We
must remember that as a general matter, the defendant seeking appli-
cation of the unclean hands doctrine must demonstrate that he has
been injured by the plaintiff's conduct. See Arnold v. City of
Spartanburg, 23 S.E.2d 735, 738 (S.C. 1943). In light of the conduct
Floyd complains of, no such demonstration has been made here.

At any rate, Floyd is in no position to complain about unclean
hands. The law clearly requires that the matter to which defendant
seeks to apply the unclean hands doctrine must be one about which
"he can in good conscience complain in equity." Arnold, 23 S.E.2d at
738. The magistrate judge's factual findings detail Floyd's consistent
and pervasive abuse of the corporations. Phone calls and political

                     10
donations are the least of those indiscretions. In other words, Floyd
cannot "in good conscience complain in equity" about any of Powell's
conduct. Arnold, 23 S.E.2d at 738. Therefore, the magistrate judge
correctly rejected Floyd's attempt to apply the unclean hands doc-
trine.

Finally, Floyd complains that the magistrate judge erred in award-
ing Powell her attorney's fees. Floyd's principal contention is that
Powell was not entitled to her fees because she was the only person
who benefitted from her suit. Therefore, he argues, her suit more
closely resembles an individual, rather than a derivative, action.

Generally, South Carolina does not permit a party to recover his
attorney's fees absent a contractual or statutory mandate. See Weeks
v. McMillan, 353 S.E.2d 289, 292-93 (S.C. App. 1987). However, a
shareholder who brings a derivative suit may recover her attorney's
fees. See, e.g., S.C. CODE ANN. § 33-7-400, Official Cmt. 1(i) (Law.
Co-op. 1990). Those recoveries may be based, as here, on an applica-
tion of the common fund theory. That theory permits such recoveries
because the suit benefits all of the shareholders and the individual
shareholder maintaining it should not have to bear the costs alone. See
Weeks, 353 S.E.2d at 293; Mills v. Electric Auto-Lite Co., 396 U.S.
375, 394 (1970) (explaining the rationale for the common fund the-
ory). South Carolina's courts have applied the common fund doctrine
to award attorney's fees in derivative actions. See, e.g., Segall, 236
S.E.2d at 318; Weeks v. McMillan, 353 S.E.2d 289, 293 (S.C. App.
1987) (noting that the Segall court appeared to apply the common
fund theory).

While Floyd correctly notes that he and Powell are the only
remaining shareholders in the corporations, we have not found -- nor
have the parties pointed to any -- authority suggesting that South
Carolina's courts would not award attorney's fees where only a very
small number of shareholders would benefit from the derivative
action. Moreover, focusing only on the small number of shareholders
neglects the benefits of derivative suits. For example, the accounting
brought about by the instant suit will help the corporations run much
more efficiently. The records of both companies were in disarray, and
many votes on important matters were not even recorded. No share-
holders' meetings had been held for years. Floyd was engaged in self-

                    11
dealing on a grand scale. Even if Floyd were not ordered to purchase
Powell's shares, the exposure and correction of those problems
greatly benefit both corporations. Those benefits not only increase the
value of Powell's shares, but also the value of Floyd's shares.

Finally, we reject Floyd's contention that the magistrate judge's
decision was based solely on his misconduct rather than on the com-
mon fund theory. Floyd correctly points out that under South Carolina
law, a losing party's misconduct is insufficient in itself to provide a
basis for an attorney's fee award. See Weeks, 353 S.E.2d at 292-93.
However, that was not the basis of the award here. To be sure, the
magistrate judge specifically cited Floyd's wrongful behavior as mak-
ing the suit necessary. However, the court expressly found Powell's
suit to be a "fund creating action," see J.A. at 514, and in any event,
shareholder suits generally involve allegations of misconduct by cor-
porate officers. Therefore, we find that the magistrate judge did not
err in awarding Powell her attorney's fees.

III.

Powell also raises several points on appeal, but we find it necessary
to discuss only two. In the Order dated January 21, 1998, the magis-
trate judge found that neither the $241,000 in attorney's fees and costs
awarded to the plaintiff, nor the $137,161 in past director's fees
awarded to the plaintiff, should be deducted from the derivative
award before taxes are calculated. We affirm that portion of the ruling
which excludes the attorney's fees related to the buyout and the direc-
tor's fees from a pretax deduction from the derivative award. We
reverse, however, that portion of the ruling which excludes the attor-
ney's fees related to the derivative action from a pretax deduction.

Powell contends that the magistrate judge should have calculated
the attorney's fees as a pretax deduction pursuant to 26 U.S.C.
§ 162(a) (1994). Section 162 permits deductions of "all the ordinary
and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business." Id. Floyd supported the pretax
deduction below, but argues that Powell is estopped from raising the
issue now because she opposed the deduction below.

Powell is not estopped. The doctrine of estoppel applies only to
matters of fact. See Folio v. City of Clarksburg , 134 F.3d 1211, 1217-

                    12
18 (4th Cir. 1998). The question of whether it is proper to deduct the
costs and attorney's fees before the taxes are calculated is a legal
question, as Floyd admits. See Appellant's Br. at 14. Moreover, the
record shows that Powell did support the deduction of the attorney's
fees prior to calculating the taxes. She took that position as an alterna-
tive to her primary position that Floyd himself should be responsible
for paying the taxes, not Gordon Farms. Because she supported the
pre-calculation deduction below, the doctrine of estoppel does not
apply.

Although Powell is not estopped from raising this issue, the con-
clusion she reaches is not entirely correct. We find that only a portion
of the fees should be deducted from the derivative recovery.

Powell urges us to permit the deduction based in part on Graham
v. Commissioner, 326 F.2d 878, 879-80 (4th Cir. 1964). In that case,
we concluded that the taxpayer's expenditures on the settlement of
and the legal expenses resulting from a suit against a member of its
board of directors were "ordinary and necessary" expenses within the
meaning of 26 U.S.C. § 212. See id. As we noted in that case, the
terms "ordinary and necessary" have the same meaning in § 162 as
they do in § 212.14 See id. at 879.

Other circuits have allowed such deductions under§ 162 and § 212
as well. For example, in Larchfield v. United States, 373 F.2d 159,
166 (2d Cir. 1966), the Second Circuit permitted a corporation, pursu-
ant to § 162, to deduct the attorney's fees and expenses it paid to a
complaining shareholder in a derivative suit. See id. Likewise, the
Third Circuit permitted the deduction of attorney's fees and costs by
a corporate shareholder who brought a derivative suit to recover from
the directors the misappropriated assets of the company it partly
_________________________________________________________________

14 Indeed, we noted that the two sections were very similar, with the
principal difference being that § 162 requires that the expenditure be
made in the course of "carrying on a trade or business." 326 F.2d at 879.
Here, however, there is no debate that the attorney's fees are directly
related to Powell's business. The only debate is whether the expenditures
are "ordinary and necessary." Thus, cases interpreting the "ordinary and
necessary" language in § 212 are helpful here.

                     13
owned. See Newark Morning Ledger Co. v. United States, 539 F.2d
929, 933-34 (3d Cir. 1976).

A recurring theme in the courts' permission of these deductions is
that the complaining shareholders sought the recovery of corporate
assets and the reversal of fraudulent transactions by corporate officers
rather than the disposition of capital assets. In finding that the expen-
ditures were "ordinary and necessary," we said in Graham that the
suit arose from the taxpayer's attempt to influence the policies of his
corporation. See id. at 880. The Second Circuit specifically noted that
Larchfield did not bring the suit to perfect or defend title in property.
See Larchfield, 373 F.2d at 167. The Third Circuit, in looking to the
origin of the claim, stated that the shareholder simply sought to pre-
vent the destruction of corporate assets rather than to gain a benefit,
and specifically noted that neither the price paid for the stock, the
value received for the stock, nor a planned disposition of corporate
assets was at issue in the case. See Newark Morning Ledger Co., 539
F.2d at 934.

Based on the foregoing authority, we conclude that in the instant
case a deduction should be allowed for legal expenses related to the
derivative action. We therefore reverse the magistrate's ruling that
instructs otherwise.

The expenses related to the buyout, however, are not deductible.
Unlike the derivative suit, the buyout award does not effect the recov-
ery of corporate assets fraudulently diverted nor does it rein in some
usurpation of corporate power. Rather, it is a transaction that involves
the disposition of a capital asset -- Powell's stock.

Arguments that the buyout request arose from the misconduct are
not persuasive, either. Certainly, Powell could have brought a deriva-
tive suit without requesting a buyout. Conversely, she could have
obtained relief without proving any misconduct on Floyd's part. See,
e.g., S.C. CODE ANN.§ 33-14-300(2)(i) (Law. Co-op. 1990) (stating
that corporate dissolution is available if corporate management is
deadlocked and irreparable injury to the corporations will result if
there is no relief); Hendley v. Lee, 676 F. Supp. 1317, 1324-25
(D.S.C. 1987)(ordering the buyout of a shareholder in a close corpo-
ration where no misconduct was even alleged). In a case also involv-

                     14
ing misconduct by a corporate officer, the Sixth Circuit disallowed
the deduction of the taxpayer's attorney's fees incurred while analyz-
ing her brother's offer to purchase her interest in their jointly owned
close corporation. See Brown v. United States , 526 F.2d 135, 137-39
(6th Cir. 1975). We find that persuasive here. Therefore, the expenses
related to the buyout are not deductible from the derivative recovery.
We therefore affirm the magistrate judge's ruling to that effect.

The magistrate judge also did not err in refusing to deduct the
director's fees from the derivative award. Under section 162(a)(1), an
individual or corporation may deduct "a reasonable allowance for sal-
aries and other compensation for personal services actually rendered"
as an ordinary and necessary business expense. See 26 U.S.C.
§ 162(a)(1). The parties do not dispute that the director's fees due
Powell are reasonable or that they are compensation for services she
actually performed (i.e., in her role as director). Thus, upon paying
the fees, Gordon Farms is entitled to deduct them as an "ordinary and
necessary" business expense.

However, the fact that Gordon Farms may lawfully deduct the fees
does not require the conclusion that it must deduct them from the
derivative award as a matter of law. Deductions under the tax code
are from the taxpayer's gross income. See 26 U.S.C. § 63; 26 U.S.C.
§ 161. Gross income is more expansive than any one specific source
of income (e.g., the derivative award); it includes "all income from
whatever source derived." 26 U.S.C. § 61. 15 Thus, the director's fees
need not be deducted from any one source of funds, but are deducted
from the taxpayer's (Gordon Farms') overall income.

Moreover, the deduction for director's fees from the specific source
of funds at issue here (the derivative award) makes even less sense.
The director's fees do not represent any part of the derivative recov-
ery -- i.e., the money wrongfully taken from Gordon Farms and Mul-
likan Vault. Rather, Gordon Farms owes the fees to Powell pursuant
to the board's separate, longstanding agreement. Thus, the director's
fees are irrelevant to the final amount of the derivative award due the
_________________________________________________________________
15 Despite the broad definition of"gross income," the tax code specifi-
cally excludes several types of revenue. See, e.g., 26 U.S.C. § 101 (cer-
tain death benefits); 26 U.S.C. § 102 (gifts and inheritances).

                    15
corporation. As a result, the magistrate judge did not err in refusing
to permit the deduction of the director's fees from the derivative
award.

Having reviewed the record, we find that the magistrate court did
not err in ruling as it did in all other challenged matters. Therefore,
those decisions are affirmed.

AFFIRMED IN PART AND REVERSED IN PART

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