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On Forms 1120S, U.S. Income Tax Return for an S Corporation,
petitioner reported net income from its trade or business for 1995,
1996, and 1997, in the respective amounts of $26,711.08,
$32,973.39, and $34,508.90. Petitioner paid these amounts to Mr.
Yeagle and reported these amounts as the Yeagles’ share of its
income on Schedules K-1, Shareholders’ Shares of Income, Credits,
Deductions, etc., of the Forms 1120S.2
During 1995, 1996, and 1997, petitioner distributed all of its
net income to the Yeagles. Petitioner reported on Schedules M-2,
Analysis of Accumulated Adjustments Account, Other Adjustments
Account, and Shareholders’ Undistributed Taxable Income Previously
Taxed, of the Forms 1120S that the amounts it paid to the Yeagles
were distributions other than dividend distributions paid from
accumulated earnings and profits.
The Yeagles timely filed Forms 1040, U.S. Individual Income
Tax Returns for 1995, 1996, and 1997. On Schedules E, Supplemental
Income and Loss, of the Yeagles’ Forms 1040, they reported their
share of petitioner’s income (as indicated on Schedules K-1) as
nonpassive income from an S corporation.
On February 23, 2000, respondent issued to petitioner a Notice
of Determination, in which respondent determined that (1) Mr.
Yeagle was petitioner’s employee for purposes of Federal employment
2 Petitioner did not allocate the income between Mr. and
Mrs. Yeagle.
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Last modified: May 25, 2011