Frank J. & Ann M. Feraco - Page 11




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          so he covered checks by moving money from one account to another.           
          He claimed the $1,700 could have been a result of the transfers,            
          but he did not identify any such transfer.                                  
               Respondent also disallowed $3,546 of expenses claimed on               
          Thomas' Schedule C in 1993.  Thomas testified that he incurred              
          these expenses on behalf of Southern Auto.  He occasionally would           
          use his own money to have cars washed and to buy gas and parts              
          for cars.  Thomas did not ask to be reimbursed because he knew              
          that Southern Auto had cash-flow problems.                                  
               Based on the additional Schedule C income of $1,700 and the            
          disallowance of $3,546 of Schedule C expenses, respondent also              
          determined that Thomas’ self-employment tax should be increased             
          by $741 and that he was entitled to an additional self-employment           
          tax deduction of $371.                                                      
               Section 61 defines gross income as all income from whatever            
          source derived.  With respect to an S corporation, section                  
          1366(a) provides that in determining a shareholder's tax                    
          liability, there shall be taken into account the shareholder's              
          pro rata share of the corporation's items of income and                     
          deduction.  A shareholder's pro rata share of any item for any              
          taxable year is the sum of the amounts determined by assigning an           
          equal portion of such item to each day of the taxable year, and             
          then by dividing that portion pro rata among the shares                     
          outstanding on such day.  Sec. 1377(a)(1).                                  





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