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their 1990, 1991, and 1992 joint Federal income tax returns.
Respondent determined that certain deductions and items of income
reported on the individual returns should have been reported on
Kaiser's corporate income tax returns. The petitions in these
cases were filed on March 13, 1995.
OPINION
Generally, a small business corporation may elect to be
treated as an S corporation. Secs. 1361(a)(1), 1362(a)(1).
Section 1362(d) provides that an election to be treated as an S
corporation terminates if the corporation has: (1) Subchapter C
earnings and profits at the close of each of 3 consecutive
taxable years; and (2) gross receipts for each of such taxable
years more than 25 percent of which are passive investment
income. Secs. 1362(d)(3), 1375.
The parties have stipulated that Kaiser had subchapter C
earnings and profits at the close of each of 3 relevant
consecutive years. The only issue is whether Kaiser had passive
investment income in excess of 25 percent of its gross receipts.
Petitioners contend that Kaiser should be allowed to include all
premiums (i.e., Kaiser's commission plus amounts forwarded to, or
retained by, the underwriters) paid on policies it issued and as
a result Kaiser's passive investment income did not exceed 25
percent of its gross receipts. Respondent contends that Kaiser
should be permitted to include only its commissions on such
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