S.W. DePasture - Page 10





                                        - 9 -                                         
          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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