Lucian T. Baldwin, III - Page 45

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          validity of the S election or conceded that the S election was              
          invalid until approximately 1 month before trial.21  In fact,               
          petitioner continued to claim that BAC was an S corporation and             
          to deduct BAC’s losses on his tax returns in 1991 and later                 
          years.22  Because the record contains no credible evidence that             
          respondent knew or had reason to know that BAC’s S election was             
          invalid until approximately 1 month before the trial in this                
          case, we reject petitioner’s reliance argument.                             
               We also reject petitioner’s argument that respondent has not           
          shown he suffered any harm as a result of petitioner’s                      
          representation.  Petitioner contends that even as a C                       
          corporation, BAC would have no taxable income because BAC’s                 
          deductions exceeded its income for the years at issue.                      
          Petitioner’s argument ignores the fact that respondent disallowed           
          all of BAC’s deductions, vigorously litigating in a 2-week trial,           
          among other issues, whether BAC’s activities were engaged in for            
          profit, whether BAC’s deductions were ordinary and necessary                

               21Under sec. 1362, once a valid S election has been made,              
          ownership of an S corporation may change without adversely                  
          affecting the S election because new owners were not required to            
          consent to the prior S election.  See sec. 1.1362-6(a)(2)(i),               
          Income Tax Regs.                                                            
               22We also note that Mr. DiMaggio’s testimony conflicted with           
          the objective facts in the record concerning petitioner’s divorce           
          case.  Mr. DiMaggio testified that Ms. Witek learned about a                
          problem with BAC in 1991 while observing the divorce trial, yet             
          the trial in the divorce case did not occur until 1993.                     

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