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determined (1) a $241,700 adjustment3 resulting from the
disallowance of a deduction for research or experimental
expenditures under section 1744 and (2) an $80,000 adjustment
eliminating IRC’s reported short-term capital gain. Petitioner
in docket No. 14872-98 does not dispute the $80,000 adjustment.
For RIC, respondent determined a $631,289 adjustment resulting
from the disallowance of a deduction for research or experimental
expenditures under section 174.5
3Under the heading of “Detail of Adjustments To Ordinary
Income”, the FSAA for IRC shows a $241,700 adjustment to research
and development expense. Under the heading of “Other
Adjustments”, the FSAA shows a $221,558 adjustment to research
and development expense and a $20,142 adjustment to qualified
investment expenses, paralleling the treatment on Schedule K,
Shareholders’ Share of Income, Credits, Deductions, etc., of
IRC’s 1984 S corporation tax return; the sum of these adjustments
is $241,700. On brief, the parties treat this as one $241,700
adjustment. For convenience, we follow the parties’ one-
adjustment terminology. This does not affect our substantive
analysis or our conclusions.
4Unless indicated otherwise, all section references are to
sections of the Internal Revenue Code of 1954 as in effect for
1984.
5Under the heading of “Detail of Adjustments To Ordinary
Income”, the FSAA for RIC shows a $631,289 adjustment to research
and development expense. Under the heading of “Other
Adjustments”, the FSAA shows a $594,192 adjustment to research
and development expense and a $37,097 adjustment to qualified
investment expenses, paralleling the treatment on Schedule K,
Shareholders’ Share of Income, Credits, Deductions, etc., of
RIC’s 1984 S corporation tax return; the sum of these adjustments
is $631,289. However, on a “STATEMENT I” of RIC’s 1984 S
corporation tax return, the deduction is broken down as follows:
(1) “research-development exp”--631,000, and (2) “other exp”--
289. The parties do not appear to focus on the differences
between these two breakdowns of the $631,289 total. Because the
(continued...)
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