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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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