- 18 -
Corp. v. Commissioner, supra at 859. Based on the record in the
instant case, we conclude that the Color Q payment meets all of
the requirements of section 162(a).
Because we have decided that the Color Q payment is an
ordinary and necessary business expense of the S Corporation that
is deductible pursuant to section 162(a), we need not consider
the parties' arguments regarding the deductibility of the payment
as a loss pursuant to section 165.5 We have considered the
parties' remaining arguments concerning the deductibility issue
and find them to be without merit. Consequently, we hold that
the Color Q payment is an ordinary and necessary business expense
to the S Corporation for its 1988 taxable year. Accordingly, we
conclude that petitioners are entitled to a net operating loss
carryforward of $58,020 for their 1990 taxable year attributable
to the S Corporation's deduction of the Color Q payment for its
1988 taxable year.
5 Citing Johnson v. Commissioner, 66 T.C. 897 (1976), affd.
574 F.2d 189 (4th Cir. 1978), respondent contends, inter alia,
that the S Corporation's "loss" was "compensated for by
insurance" within the meaning of sec. 165. Johnson is
distinguishable because we concluded in that case that the
taxpayer's insurance policy on the life of his partner "was
intended to compensate the * * * [taxpayer] for the loss of his
investment [in the partnership], and that is precisely what it
did." Johnson v. Commissioner, supra at 903. In the instant
case, however, we are satisfied that the S Corporation's life
insurance policies in the names of petitioner and Mr. Jeffcott
were not purchased to compensate for potential embezzlement
restitution payments. Consequently, we conclude that, were we to
consider the loss issue, Johnson would not be dispositive of the
instant case.
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