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Petitioners substantiated a large part of the expenses
during their meetings with respondent's Appeals officer by
providing the requisite documentation at that time.
(3). Interest Expense Deduction (PCCL)
The notice of deficiency to PCCL adjusted a claimed interest
expense deduction in the amount of $37,777. Respondent
disallowed the interest expense deduction because "it has not
been established that any amount constitutes an ordinary and
necessary business expense or was expended for the purpose
designated nor that a bona fide debt existed". For the reasons
stated in the "Other Deductions" analysis, respondent had a basis
in fact at the time of the notice of deficiency for his position
of disallowing the interest deduction. PCCL did not substantiate
this claimed deduction until it provided the requisite documents
to respondent's Appeals Office subsequent to the filing of the
petition.
In addition, during the course of respondent's examination,
respondent had interviewed a former employee of PCCL with regard
to this matter. Respondent was provided with pertinent
information that a related entity, Dorrial, Inc., was set up as a
"shell corporation", with the purpose of diverting PCCL funds.
Also, Paige had provided respondent with information regarding
the loan and related company in issue.
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