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consulting services to the Ohanesian Family Trust (the Trust) and
Seven Resorts, Inc. (SRI), a corporation controlled by the Trust
(collectively referred to herein as the related entities), in
exchange for an annual fee equal to 2 percent of the gross assets
owned by the Trust and 2 percent of the gross revenue realized by
SRI. The written agreements contained no provision which
obligated or required petitioner to pay personal expenses of the
Ohanesian family or SRI. Nevertheless, during the years in
issue, petitioner purchased and maintained several luxury
automobiles for members of the Ohanesian family. Petitioner also
leased and furnished office space for SRI.
During TYE 1988 and TYE 1989, petitioner received funds from
SRI and the Trust through John and Ethel Ohanesian (the
Ohanesians). Petitioner reported the amount of funds received as
income on its Federal income tax returns for those years. On its
returns for TYE 1988 and TYE 1989, petitioner claimed deductions
for various expenses, including the depreciation and upkeep of
the luxury vehicles for members of the Ohanesian family and
office space for SRI. On their joint Federal individual income
tax returns for the years overlapping petitioner's taxable years
at issue, the Ohanesians deducted the amounts paid to petitioner
as investment expenses.
At some point in 1989, Mike and Ohanesian had a "falling
out", which resulted in Ohanesian's terminating the agreements on
November 15, 1989, and withholding payment of the contract fees
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