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and hold the balance for the underwriters in a separate "premium
account". Kaiser's contracts with each underwriter required
Kaiser to hold such funds in a fiduciary capacity and prohibited
Kaiser from commingling them with Kaiser's own funds. Kaiser
would later send these funds to the underwriter. In the case of
direct premium payments, the underwriter would send Kaiser its
commission and retain the balance.
Kaiser elected subchapter S status on July 1, 1987, and
filed Forms 1120S (U.S. Income Tax Return for an S Corporation)
in 1990, 1991, and 1992. Kaiser reported its income on the
accrual method of accounting. In calculating its gross income,
Kaiser included in its gross receipts the premiums paid on all
policies issued by it during the year and deducted as a cost of
goods sold the portion of the premiums forwarded to the
underwriters (in the case of indirect premium payments), or
retained by the underwriters (in the case of direct premium
payments).
Respondent issued a notice of deficiency, dated December 22,
1994, to Kaiser Family Corporation (the successor in interest to
Kaiser) for years 1990, 1991, and 1992. In the notice,
respondent determined that Kaiser was not an S corporation during
the years in issue. As a result, respondent determined that
Kaiser owed corporate income taxes as a subchapter C corporation.
Respondent issued a second notice of deficiency, also dated
December 22, 1994, to William and Margaret Kaiser relating to
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