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These adjustments form the basis of the adjustments to the
shareholder pro rata income of CWS here in dispute. For each
year in issue, respondent also determined that the underpayment
of tax required to be shown on petitioner’s return is due to
negligence and/or a substantial understatement of income tax.
Discussion
1. Shareholder Pro Rata Income From CWS
Petitioner now agrees that the shareholder pro rata income
from CWS reported on his return for each year is understated and
that the understatement is measured by the disallowed business
expense deductions claimed by CWS. Furthermore, although he
disputes respondent’s computation of the amount, petitioner
now agrees that CWS realized capital gain income from the
distribution of the Mystic Lake property, see secs. 311(b),
1371(a); Martin Ice Cream Co. v. Commissioner, 110 T.C. 189,
219-220 (1998); Eustice & Kuntz, Federal Income Taxation of
S Corporations, par. 1.03(2)(d)(ii), at 1-61, par. 8.02(1)(a),
at 8-24, par. 8.04(9), at 8-79 (4th ed. 2001), and that a like
amount of capital gain should have been included in the
shareholder pro rata income reported on petitioner’s 1995
Federal income tax return. According to petitioner, however,
respondent’s computation of the capital gain is overstated
because respondent overstated the fair market value of the
property and understated the adjusted basis of the property.
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