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conclude that Western did not use a permitted year as defined in
section 1378(b) for any year before or during the years in issue.
3. Whether Western Is an S Corporation
Petitioners contend that under Rev. Proc. 97-48, 1997-2 C.B.
521, Western was an S corporation during the years in issue
because Western followed procedures required to qualify as an S
corporation, including filing Forms 1120S for 1994-2002. We
disagree. Corporations which file a late election for S
corporation status may be eligible for relief under Rev. Proc.
97-48, supra. As previously discussed, Western failed to qualify
as an S corporation because it did not use a tax year permitted
under section 1378(a), not because it filed its S corporation
election late. Thus, Western is not eligible for relief under
Rev. Proc. 97-48, supra.
Petitioners contend that respondent failed to act on their
election of S corporation status for Western and that this
failure resulted in deemed approval. We disagree that respondent
failed to act. By letter to petitioners dated December 21, 1998,
respondent stated that respondent had rejected S corporation
status for Western before the returns for the years in issue were
due.
4. Whether Petitioners Substantiated Their Claimed
Flowthrough Losses From Western
Petitioners contend that they substantiated the amounts of
Western’s losses they deducted (as flowthrough) on their income
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