Daniel E. and Karen A. Harkins - Page 3

                                        - 3 -                                         
          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.                           

Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  Next

Last modified: May 25, 2011