- 71 -
Under its cash method of accounting, MIT 85 claimed a net
loss of $2,700,000, which was the excess of the $3,512,527
payroll costs over reported partnership income of $812,527, an
amount that includes compensation fee income and a relatively
small amount of interest earned.22
On their individual income tax returns for 1985, the 10
investors in MIT 85 reported Schedule E partnership losses
totaling $2,700,000 from MIT 85 in proportion to their interests.
Respondent issued a notice of final partnership
administrative adjustment to MIT 85, wherein respondent
disallowed the entire claimed MIT 85 partnership loss of
$2,700,000 for the year 1985.
For the period January 1 through June 30, 1985, Machise/
Intercoastal accrued and deducted, on its consolidated income tax
return, "Rents" of $2,110,835. For the period July 1 through
December 31, 1985, Machise/Intercoastal accrued, and deducted for
Federal income tax purposes, an additional $2,104,042.23 For the
22The $3,512,399 amount "advanced" by Machise to the MIT 85
payroll account exceeds the $2,700,000 amount "advanced" by MIT
85 to Machise under the employee leasing agreement. See supra
note 20. Some $808,786 of the difference between the amounts
allegedly advanced by MIT 85 and those advanced to MIT 85 was
recorded as a prepayment of the compensation fee on Dec. 31,
1985, and is reflected in MIT 85's income for that year.
Additionally, the payroll figure includes some $3,741 in
interest.
23Intercoastal/Machise filed an amended Form 1120 for the
fiscal year ended June 30, 1986, in order to reflect a change in
its net operating loss carryover from a prior year.
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