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reported combined taxable wage income of $43,251 in 1996 and
$52,187 in 1997. In addition, petitioners received $30,000 of
income in each year representing the payments resulting from the
lawsuit discussed above.
During the years in issue, petitioner was the sole
shareholder of an S corporation named Southern Financial
Investment Services, Inc. (SFIS). SFIS was incorporated in
January 1990, and elected Subchapter S status in 1996. From its
incorporation until the time of trial, SFIS had never generated
positive net income. The following represents the “receipts” and
“deductions” of SFIS in each of the years for which the amounts
appear in the record:
1991 1993 1994 1995 1996 1997
Receipts $-0- $-0- $49,705 $3,829 $335 $292
Deductions -0- -0- (79,611) (54,445) (15,308) (15,163)
Net loss -0- -0- (29,906) (50,616) (14,973) (14,871)
In the years in issue, SFIS reported the following on its
corporate Federal income tax returns:
1996 1997
Gross receipts $335 $292
Cost of goods sold -0- (4,947)
Rents -0- (1,200)
Taxes and licenses (2,551) (1,193)
Interest (2,592) (23)
Depreciation (289) (289)
Advertising (372) (114)
Legal/professional (2,577) (2,577)
Other expenses (6,927) (4,820)
Ordinary loss (14,973) (14,871)
In each year, petitioners claimed a deduction for the entire loss
on their individual income tax return as petitioner’s 100 percent
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