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of the four affiliates lent money to AJCS in their first fiscal
year, which, to some extent, paralleled AJCS’s 1993 taxable
year.9 The affiliates’ returns disclose outstanding loans to
AJCS at the end of their 1993 fiscal years totaling more than
$2,300,000. This fact undermines petitioners’ argument that the
affiliates were unable to pay their own expenses. Arguably, some
of AJCS’s payments of the affiliates’ expenses could have
conferred some benefit on AJCS. Petitioners, however, have not
shown any such benefit and have failed to show that they
satisfied the Lohrke test.
Petitioners also argue that AJCS was entitled to deduct the
expenses because AJCS could not allocate its general and
administrative expenses among the various contracts transferred
to the affiliates. At trial, John Snider, AJCS’s chief financial
officer, testified that the affiliates paid AJCS a “fee based on
the proportional overhead that applies to the revenue and
expenses”, and “the overhead for * * * [general and
administrative] expenses was charged to the * * * [affiliates]
based on their revenues.” Accordingly, petitioners’ contention
that AJCS could not allocate its general and administrative
expenses to each transferred contract is, in effect, incorrect.
9 Petitioners contend that the amounts listed as loans on
the affiliates’ tax returns are actually intercompany accrued
expenses/reimbursements so as to track what each affiliate and
AJCS owed each other. Petitioners have not presented
corroborative evidence to support their characterization.
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