Ed and Patricia A. Montgomery - Page 9




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          reported combined taxable wage income of $43,251 in 1996 and                
          $52,187 in 1997.  In addition, petitioners received $30,000 of              
          income in each year representing the payments resulting from the            
          lawsuit discussed above.                                                    
               During the years in issue, petitioner was the sole                     
          shareholder of an S corporation named Southern Financial                    
          Investment Services, Inc. (SFIS).  SFIS was incorporated in                 
          January 1990, and elected Subchapter S status in 1996.  From its            
          incorporation until the time of trial, SFIS had never generated             
          positive net income.  The following represents the “receipts” and           
          “deductions” of SFIS in each of the years for which the amounts             
          appear in the record:                                                       
               1991      1993      1994      1995      1996      1997                 
               Receipts       $-0-      $-0-   $49,705    $3,829      $335      $292  
               Deductions      -0-       -0-   (79,611)  (54,445)  (15,308)  (15,163) 
               Net loss        -0-       -0-   (29,906)  (50,616)  (14,973)  (14,871) 
          In the years in issue, SFIS reported the following on its                   
          corporate Federal income tax returns:                                       
                                          1996           1997                        
               Gross receipts           $335           $292                           
               Cost of goods sold       -0-         (4,947)                           
               Rents                             -0-         (1,200)                  
               Taxes and licenses             (2,551)        (1,193)                  
               Interest                       (2,592)           (23)                  
               Depreciation                     (289)          (289)                  
               Advertising                      (372)          (114)                  
               Legal/professional             (2,577)        (2,577)                  
               Other expenses                 (6,927)        (4,820)                  
               Ordinary loss                 (14,973)       (14,871)                  
          In each year, petitioners claimed a deduction for the entire loss           
          on their individual income tax return as petitioner’s 100 percent           






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