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company), a corporate entity incorporated under the laws of
Arizona and classified for tax purposes as an S corporation. See
secs. 1361-1363. During the year in issue, the theater company
used the accrual method of accounting to report its income and
expenses. Because the theater company is classified as an S
corporation for Federal income tax purposes, the income and
expenses reported by the theater company flow through to
petitioners' personal tax return. See sec. 1366.
At the time of trial, the theater company operated 19 movie
theaters with a total of 198 movie screens. Along with providing
motion picture entertainment, the theater company sells food and
beverages at snack bars located inside its movie theaters. In
order to generate significant and consistent revenues from its
food services, Mr. Harkins, as president of the theater company,
entered into an agreement with Pepsi to purchase postmix products
for use in preparing Pepsi brand soft drinks.3 Among other
requirements, the theater company agreed to purchase Pepsi paper
cups, Pepsi compressed CO2, and certain equipment used in the
preparation of fountain soft drinks. The term of the agreement
3 The theater company did not generally sell any premixed
and prepackaged Pepsi products (i.e., Pepsi-brand bottles or cans
generally available to the public at stores and supermarkets).
There is an indication in the record, however, that the theater
company sold Aquafina, Pepsi-brand bottled water.
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