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The deficiency is based on an adjustment to the income of
petitioners’ wholly owned S corporation and a corresponding
increase in petitioners’ distributive share of the S corporation’s
income. The adjustment stems from the disallowance of: (1) A
deduction for a $300,000 “profit participation fee” purportedly
paid in 1989 by the S corporation to petitioners’ wholly owned C
corporation; and (2) travel and automobile expenses claimed by the
S corporation. (An S corporation’s income is passed through to its
shareholders; thus, the disallowance of deductions claimed by an S
corporation results not only in an increase in the income of the S
corporation but also in an increase in the shareholders’
distributive shares of the S corporation’s income.)
In their petition, petitioners contest the increase to their
distributive share of the S corporation’s 1989 income, as well as
the imposition of the section 6662(a) accuracy-related penalty. By
way of an amendment to their petition, petitioners assert
entitlement to a business bad debt deduction in 1990, which, if
petitioners are correct, can be carried back to 1989, the year at
issue.
Accordingly, the issues for decision are: (1) The propriety
of the $300,000 “profit participation fee” deduction claimed by
petitioners’ wholly owned S corporation; (2) the propriety of
travel and automobile expense deductions claimed by petitioners’
wholly owned S corporation; (3) whether petitioners’ advances to
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Last modified: May 25, 2011