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We disagree with petitioner’s reasoning. First, the
examining agent’s characterization of KSCI as a C corporation
was a result of the misapplication of the personal holding
company provisions of the Internal Revenue Code. Mr. Matos was
instructed by his supervisor to research the effect of the
personal holding company rules on the Chans’ Form 1040 and
KSCI’s Form 1120S. Mr. Matos’s activity record indicates that
Mr. Matos researched, albeit cursorily, the personal holding
company provisions and concluded that two tests determined
whether a corporation was a personal holding company: The
stock ownership test and the adjusted gross income test. It
appears that on the basis of this research Mr. Matos’s
supervisor instructed him to apply the personal holding company
provisions to KSCI.
Mr. Peter, the Appeals officer assigned to the
administrative appeal of the underlying cases, determined that
Mr. Matos had incorrectly treated KSCI as a personal holding
company. Mr. Peter concluded that pursuant to section 1363(a)
the personal holding company tax is not applicable to electing
subchapter S corporations. Section 1363(a) provides that
“Except as otherwise provided in this subchapter, an S
corporation shall not be subject to the taxes imposed by this
chapter.” The chapter referred to is chapter 1 of the Internal
Revenue Code of which the personal holding company provisions
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