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taught one client, a Mr. Labruzzo, how to operate one of the
boats.
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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