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stolen insurance money. The Chens are certainly right about part
of this. Of the $287,000 deposited into the Beam account,
$154,409 was transferred to PCTI, with $140,372 applied to a
Citirom receivable. The Commissioner concedes that $14,037 of
the proceeds was reported by PCTI, and thus flowed through to the
Chens in 1998, leaving $272,963 in unreported income.7 The Chens
argue, however, that the $154,409 that they transferred to PCTI
after a short detour through the fake Beam account should be
regarded as PCTI’s income, not their own.
The problem with this argument is that PCTI was an S
corporation, and an S corporation’s income is generally taxable
to its owners, not to the corporation itself, sec. 1363(a); and
whether or not the income is distributed, sec. 1366(a). In any
event, the Chens never identified any exception to the general
rules making PCTI’s income taxable to them. The $140,372 is
therefore income to the Chens in 1998, and the IRS is right that
the total amount of unreported income is $272,963.
The Chens also argue that if the insurance proceeds had not
been misapplied by PCTI’s accountant to wipe out one of Citirom’s
outstanding accounts receivable, PCTI would have been entitled to
a bad debt deduction for $140,372 on its 1998 return. The
Citirom receivable was held by PCTI and so flowed through to the
7 The Commissioner’s concession is derived by subtracting
the total transferred back to PCTI from the amount applied to the
Citirom account ($154,409 - $140,372 = $14,037).
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