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source of income. Ridge and his wife, Jean S. Ridge
(Mrs. Ridge), each owned 50 percent of petitioner from the time
of its incorporation and throughout 1996, 1997, and 1998.
Ridge has at all times served as petitioner’s president.
During 1996, 1997, and 1998, Ridge performed all services
necessary to generate gross receipts on behalf of petitioner.
No other person provided services to petitioner.
During 1996, 1997, and 1998, petitioner did not make regular
payments at fixed times to Ridge for his services. Rather, Ridge
received funds from petitioner as his needs arose. Petitioner
neither classified any payment as a dividend nor distributed any
dividends to shareholders from 1996 through 1998.
Petitioner’s Tax Reporting
Petitioner timely filed Forms 1120S, U.S. Income Tax Return
for an S Corporation, and related schedules, for each of the
years 1996, 1997, and 1998. Petitioner reported ordinary income
from its trade or business of $26,173.32, $17,052.98, and
$4,822.46 for 1996, 1997, and 1998, respectively. Petitioner
claimed no deduction either for compensation of officers or for
salaries and wages in 1996; for 1997 and 1998, petitioner’s
returns reflect deductions of $16,500 and $14,000, respectively,
for compensation of officers. Schedules K-1, Shareholder’s Share
of Income, Credits, Deductions, etc., attached to the returns
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