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II. Facts
The majority has set forth many of the facts stipulated by
the parties, and, for the most part, I shall not repeat those
facts. The following facts relate to petitioner’s return,
respondent’s determination of a deficiency, and the pleadings in
this case.
On its Form 1120, U.S. Corporation Income Tax Return, for
1995, petitioner reported gross receipts of $2,938,726, no amount
of cost of goods sold, and a gross profit equal to its gross
receipts. Among other items, petitioner deducted $772,522 for
“medical supplies” (chemotherapy drugs), $600,328 for
compensation paid to its three physician-shareholder-officers
(officer compensation), and other salaries and wages of $630,381.
Petitioner’s deduction for chemotherapy drugs equaled 26 percent
of its reported gross receipts and gross profits and 129 percent
of its officer compensation.
For 1995, under the hybrid method, respondent disallowed the
deduction for chemotherapy drugs claimed by petitioner and
required petitioner to recompute its gross profit by subtracting
from gross receipts (determined under an accrual method) the cost
of the chemotherapy drugs “conveyed” (sold) by petitioner during
that year. The net adjustment to petitioner’s 1995 taxable
income (the net adjustment) was an increase of $180,344,
resulting from (1) an increase of $148,557 in gross receipts to
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