Daniel E. and Karen A. Harkins - Page 2

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          petitioners must report as income in 1996 amounts paid during               
          1996 by Pepsi-Cola Co. (Pepsi) to Daniel E. Harkins' (Mr.                   
          Harkins') solely owned S corporation and (2) whether petitioners            
          must report as income in 1996 amounts paid in 1997 by Pepsi which           
          are associated with the S corporation's activities in 1996.                 
          Because the S corporation reports its income on the accrual                 
          method of accounting, we evaluate the above issues within the               
          context of sections 446 and 451 and the regulations thereunder.2            
                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated and are so found.               
          The stipulation of facts and the attached exhibits are                      
          incorporated herein by this reference.  At the time they filed              
          their petition, petitioners' residence was in Paradise Valley,              
               Mr. Harkins operates various motion picture theaters                   
          throughout the State of Arizona, most of which are located in the           
          greater Phoenix area.  He conducts his movie theater business               
          through Harkins Amusement Enterprises, Inc. (the theater                    

          individuals.  As to certain Schedule E, Supplemental Income and             
          Loss, income determined and deductions disallowed by respondent,            
          petitioners concede that they have additional income of $5,195              
          and that they are not entitled to deductions of $55,744 for rent            
          and $46,478 for repair and maintenance. Respondent concedes that            
          $7,941 in interest income is not subject to taxation.                       
               2  Section references are to the Internal Revenue Code in              
          effect for 1996, and all Rule references are to the Tax Court               
          Rules of Practice and Procedure.                                            

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