Jimmy D. and Marlene M. Morloc Weaver - Page 1

                                          121 T.C. No. 14                                               

                                     UNITED STATES TAX COURT                                            

                        JIMMY D. WEAVER AND MARLENE M. MORLOC WEAVER,                                   
                        Petitioners v. COMMISSIONER OF INTERNAL                                         
                        REVENUE, Respondent                                                             

                  Docket No. 8262-01.               Filed October 8, 2003.                              

                        P owned 80-percent interests in an S corporation                                
                  (CL) and a C corporation (J).  CL is an accrual method,                               
                  calendar year taxpayer.  J is a cash method, fiscal                                   
                  year taxpayer with a July 31 yearend.  On each of its                                 
                  1996 and 1997 Federal income tax returns, CL deducted                                 
                  an amount owed to J for services which J rendered to CL                               
                  during the corresponding year.  J included in its gross                               
                  income for its taxable years ended in 1997 and 1998 the                               
                  amounts deducted by CL for 1996 and 1997, respectively.                               
                  CL had not as of Mar. 15, 1997 and 1998, paid to J any                                
                  of those amounts which J included in its gross income.                                
                        Held:  CL fails the economic performance                                        
                  requirement of sec. 461(h), I.R.C., as to its                                         
                  deductions.  That requirement, in conjunction with sec.                               
                  404(d), I.R.C., and the temporary regulations                                         
                  thereunder, mandates that CL deduct each amount for its                               
                  taxable year the last day of which is within 2-1/2                                    
                  months of the day on which the amount is includable in                                

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