of the issues raised by the pleadings have been disposed of by
agreement of the parties, leaving for decision: (1) The proper
amount to be allowed as a deduction to petitioner for reasonable
compensation of officers; (2) to what extent, if any, the amount
allowable to petitioner as a deduction for officers' compensation
for the year at issue should be allocated to mixed service costs
and capitalized pursuant to section 263A; and (3) whether
petitioner is liable for an accuracy-related penalty under
section 6662(a) for the year at issue.
FINDINGS OF FACT
Some of the facts have been stipulated and are found
accordingly.
Petitioner's principal place of business at the time of the
filing of the petition in this case was Vernon, California.
During the year at issue, petitioner was engaged in the business
of converting yarn to fabric. PST, Inc. (PST), was the
predecessor company to petitioner and was formed by Patti Penalba
(Mrs. Penalba) and Marcos Penalba (Mr. Penalba). PST was a
textile converting operation, which is an operation that
purchases raw textile materials, known as gray goods, commissions
out the materials to operators that produce the fabric, and then
has the fabric finished at dye houses, after which the fabric is
sold to clothing manufacturers.
Petitioner was incorporated in 1984. Mr. and Mrs. Penalba
were married prior to and during the year at issue, but had been
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