- 72 -
two periods, these amounts totaled $4,214,877, or 120 percent of
the amounts paid by MIT 85 for payroll costs.
Respondent issued a statutory notice of deficiency to
Intercoastal. Therein respondent disallowed Intercoastal's
claimed deductions for the fiscal years ended June 30, 1985 and
1986, of those parts of its "rents" expense paid to MIT 85 that
represent 20 percent of the compensation fee under the employee
leasing agreement. Respondent also disallowed the management fee
expense and the interest expense.
MIT 85 closed its bank accounts early in 1986. On July 1,
1986, after the payroll costs were paid, MIT 85 billed Machise
for 120 percent of their total amount, as the compensation fee.
By that time, however, MIT 85 should have billed MPC, which, the
day before, had purchased all of the financial paper assets of
Machise that had been generated in the yearly employee leasing
agreements to which Machise was a party.
In subsequent years, MIT 85 engaged in noncash transactions,
made by issuing, endorsing, and canceling notes, and recorded by
journal entries. These included Machise's execution of demand
notes without interest to MIT 85 in the amount of $412,722 as
deferred payment of the compensation fee plus interest (the 10-
percent late charge). As with MIT 84, the payments went from
Machise to MIT 85, then to its partners, then to Qulart, and
finally back to Machise. Thus, on its partnership return for
1986, MIT 85 reported partnership taxable income of $412,722,
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