Patrick E. Catalano - Page 4

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          taught one client, a Mr. Labruzzo, how to operate one of the                
               Petitioner reported his corporation's lease payments for the           
          boats as rental income on Schedule E of his individual Federal              
          income tax returns, against which he deducted expenses relating             
          to the boats, including repairs, maintenance, insurance,                    
          interest, taxes, docking fees, and depreciation.  Petitioner's              
          corporation deducted the boat lease payments on its Federal                 
          corporate income tax returns.  For its fiscal years, which ended            
          May 31, the corporation reported boat lease expenses in 1990 of             
          $57,995, in 1991 of $15,816, and in 1992 of $110,714 and deducted           
          80 percent of these amounts, pursuant to section 274(n).  For the           
          same years it reported 1990 income of $40,346, a 1991 loss of               
          $218,390, and income in 1992 of $136,162.                                   
               Respondent accepted petitioner’s treatment of the boat lease           
          payments and related expenses on Schedule E of his individual               
          returns, but disallowed the corporation's deductions of the lease           
          payments for the years in issue.  The disallowances increased the           
          corporation’s income, or decreased its losses, by the amounts               
          disallowed.  Because an S corporation's income and losses are               
          passed through to its shareholders, the effect of the                       
          disallowances was to increase the income, or decrease the loss,             

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