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workmen’s compensation or insurance expense had been claimed
within cost of goods sold.
East was the only affiliate that was shown to have deducted
an insurance expense for workmen’s compensation. East’s short
year return for the period ended March 31, 1993, reflects a
$5,332 deduction on line 26 for “W/C insurance”, and East’s
Schedule M-1 reflects a “W/C accrual” of $83,536. No workmen’s
compensation insurance deduction is listed on East’s March 31,
1994, return.
OPINION
Petitioners were the shareholders of AJCS, an S corporation.
Accordingly, any adjustment to AJCS flows through to petitioners.
Respondent determined that several adjustments were necessary to
items reported on AJCS’s 1993 return, resulting in flowthrough
adjustments and income tax deficiencies for petitioners’ 1993
taxable year.
I. AJCS’s Expenditures in Connection With the Contracts
Transferred to the Affiliates
The first issue for our consideration is whether AJCS’s
expenditure of $2,261,555 is deductible as AJCS’s ordinary and
necessary business expenses or whether those expense obligations
pertained to the four affiliates.8
8 With respect to the $2,261,555 adjustment, respondent has
abandoned his alternative argument under which allocations of the
$2,261,555 in expenses would have been made to the four
(continued...)
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