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On November 18, 1991, the Skin Service Club, Inc. (Skin
Service Club), was incorporated as a C corporation under
California law. Petitioner and his brother, David Sywehong
Chin, each owned 50 percent of the Skin Service Club stock. Two
years later, on November 15, 1993, the Skin Service Club elected
to be taxed as an S corporation.
The Skin Service Club conducted business at the Sherman Oaks
Property in 1992, 1993, and 1994. Petitioner, however, did not
acquire, in his name, any City of Los Angeles permits or licenses
needed to conduct business in the town of Sherman Oaks. In
addition, petitioner never maintained a medical or surgical
listing in any Sherman Oaks telephone directory, and he was not a
member of the Los Angeles County Medical Society.
For both years at issue, the Skin Service Club reported zero
gross receipts. Further, the Skin Service Club did not generate
any revenue from the time of its conversion to an S corporation
through December 30, 1996, when the company was dissolved.
During its entire period of operation, the Skin Service Club did
not claim any rent expense relating to the Sherman Oaks Property.
On November 13, 1991, petitioner executed a 10-year lease on
suite B of the Sherman Oaks Property, with petitioner’s mother as
landlord. Under the terms of the lease, petitioner made rent
payments to his mother of $52,000 in 1994 and $48,000 in 1997.
Petitioner deducted these amounts as business expenses on his
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