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agreement was executed and signed solely by Mr. Stewart in his
individual capacity and as the only shareholder and director of
R.M. Stewart, Inc. The payments under the agreement are capped,
and they are not payable in the case of capital improvements or
expansion.
Transactions among related taxpayers are subject to close
scrutiny, and, in these circumstances, “it is the nature and
origin of a transaction, rather than its form, that must be
accorded controlling weight.” Tulia Feedlot, Inc. v. United
States, 513 F.2d 800, 805 (5th Cir. 1975); Pan Am. Foods, Inc. v.
Commissioner, T.C. Memo. 1997-136, affd. 163 F.3d 1354 (5th Cir.
1998). Petitioners have not shown that the corporation rendered
any general management services to the sole proprietorship, and
we cannot agree that Mr. Stewart’s payments of $120,000 in 1995
and $100,000 in 1996 to that entity as compensation for those
services are deductible business expenses. Accordingly, we
sustain respondent’s determination.
Respondent also determined accuracy-related penalties for
1995 and 1996. An accuracy-related penalty of 20 percent is
imposed on any portion of an underpayment of tax that is
attributable to negligence or to any substantial understatement
of income tax. Sec. 6662(a) and (b).
There is a substantial understatement of income tax if the
amount of the understatement for the taxable year exceeds the
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