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taxable years ended July 31, 1997 and 1998, as J.D.’s 1997 and
1998 taxable years, respectively.)
On its 1996 tax return, Clarkston deducted a professional
(management) fee of $30,000 for services rendered to it during
that year by J.D. J.D. included the $30,000 in its taxable
income for its 1997 taxable year. On its 1997 tax return,
Clarkston deducted a professional (management) fee of $63,350 for
services rendered to it during that year by J.D. J.D. included
the $63,350 in its taxable income for its 1998 taxable year.
Petitioners reported on their 1996 and 1997 Federal income
tax returns deductions for the fees and other expenses passed
through to them from Clarkston. As relevant herein, respondent
determined that Clarkston could not deduct the $30,000 as an
expense for 1996 or $60,000 of the $63,350 as an expense for
1997. Respondent determined that Clarkston could deduct the
$30,000 for 1997.
As of July 31, 1998, Clarkston had not paid to J.D. any of
the $90,000 in fees ($60,000 + $30,000). Clarkston issued to
J.D. an intercompany note reflecting this amount. Subsequently,
J.D. merged into Clarkston pursuant to section 368, and filed a
final tax return as a C corporation for the period ended
April 30, 2000. The $90,000 intercompany note was during the
final return year of J.D. eliminated by book entry as a result of
the merger.
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