- 17 -
receive income (see par. A-1, above), we conclude that WRI may
not deduct $173,174 for services rendered to WRI by Pro-Ser, and
Wise may not include in gross income $231,746 related to those
services. We agree with respondent on these issues.
2. Officers' Compensation and Reallocation of Expenses
Respondent contends that (a) WRI should deduct $88,825 for
officer compensation, (b) Wise should include $38,500 as
compensation, and (c) $17,197 of Wise's expenses reported on
Schedule C of his 1988 tax return should be reallocated to
Schedule A. Petitioners contend that the payments were loan
repayments and therefore should neither be deducted by WRI nor
included by Wise.
Respondent contends that the payments were officers'
compensation. We disagree because WRI did not pay any officers'
compensation. Petitioners contend that the payments were loan
repayments. We disagree. Wise's "loan backs" to WRI lacked
economic effect because the payments were neither received nor
lent back. Sec. 1.451-2(a), Income Tax Regs. See par. B-1,
above. Instead, we conclude that the amounts were paid to Wise
for management and accounting fees performed by Wise through Pro-
Ser. Thus, (a) WRI may deduct the $88,825 it paid to Wise, (b)
Wise must include in gross income $38,500 of the amount he
received, and (c) the Wises correctly reported expenses on
Schedule C of their tax return.
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