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with the partnership. Under the terms of the lease, Robert was
required to pay rent of $12,000 per year.
Before contributing the ranch to the partnership, Robert did
not treat the ranch as a business. He maintained the ranch in the
same manner both before and after its transfer. Robert raised and
trained mules on the ranch. Any income from the sale of the mules
went to Robert individually, not to the partnership. On the
Thompson Partnership tax returns for the years 1993 through 1996,
however, the partnership claimed losses from the operation of the
ranch.
On several occasions, the partnership paid the rent it
received from Robert to Thompson Corp. as a management fee. For
the years 1993, 1994, and 1995, management fees were paid by the
Thompson Partnership to Thompson Corp. in the amounts of $23,625,
$45,000, and $47,500, respectively.9
Robert was paid an annual salary of $32,001 as president of
Thompson Corp. Robert’s wife, Karen, was paid a salary of $350 a
month for assisting with recordkeeping. She used the money to fund
her retirement account.
Thompson Corp. carried workman’s compensation insurance on
Robert and Karen that covered any injury or accident they suffered
in their home. In addition, the corporation paid the following
9 For the years 1996 and 1997, management fees were paid by
the Thompson Partnership to Thompson Corp. in the amounts of
$52,800 and $48,000, respectively.
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