49
deductions to the corporate partners for amounts included in
distributable income of the partnership would result in doubly
taxed income. To the extent that the funds were merely
transferred through Pertinax to Mr. Munro, Pertinax did not
actually receive gross income that should properly increase
partnership income distributable to its partners.
Neither party complied with our request. Because of the
difficulty in tracing that we have mentioned, it is possible that
some of those amounts may have been reported in years not before
us.24 Nevertheless, we believe that the bulk of the disallowed
payments made by the corporate partners to Pertinax was used by
Pertinax to make payments to Mr. Munro that exceeded reasonable
compensation during the years before us. We will give
petitioners a last opportunity, during the Rule 155 computation,
to establish the mathematical computations and corrections
necessary to avoid this problem. See The Home Group, Inc. v.
24We realize that the double taxation we are concerned about
would occur in two different taxable years of the corporate
petitioners. The disallowance of the payments made to Pertinax
by Alondra and Edco occurs during their fiscal years ending June
30 and Sept. 30, 1987, respectively. The Pertinax income on
which they would be taxed as a result of the Pertinax
disallowance of deductions would be taxed to them in their
immediately following fiscal years ending June 30 and Sept. 30,
1988, respectively. This is because Pertinax is on a calendar
year, consistently with the limitations of sec. 706(b), and its
partners include within their income for a taxable year of theirs
any sec. 702 distributive share taxable income with respect to a
partnership for any taxable year of the partnership ending within
or with the taxable year of the partner. Sec. 706(a). However,
the fact that the corporate petitioners would not be taxed on
their distributive shares of the phantom income before us here
until their following tax year, which is not before us, would not
obviate the double taxation danger we see here.
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