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the years at issue, the Galyen Agency had less than $1 million in
annual sales and fewer than 30 employees. The Galyen Agency
subscribed to the program for the taxable years 2000, 2001, and
2002. On the subscription for each year, the Galyen Agency chose
promotional service program C. The subscription contracts do not
include the names of the referrals made by the Galyen Agency.
The Galyen Agency paid AdaCom $2,500 and was credited with $7,750
in promotional services.
The gross income of the Galyen Agency for the taxable years
2000, 2001, and 2002 was $272,052, $210,847, and $21,803,
respectively. These amounts included $7,750 each year as
bartering income for promotional services from AdaCom.
On the basis of the subscriptions to the program, the Galyen
Agency claimed a $5,250 business expense deduction and a $5,000
section 44 credit on Form 1120S, U.S. Income Tax Return for an S
Corporation, for each of the years 2000, 2001, and 2002.
On their Form 1040, U.S. Individual Income Tax Return, for
taxable years 2000, 2001, and 2002, petitioners reported Schedule
K-1, Shareholder’s Share of Income, Credits, Deductions, etc.,
distributive shares of $83,324, $39,921, and $8,935 of nonpassive
income from the Galyen Agency, respectively.
Respondent determined deficiencies in petitioners’ Federal
income tax for 2000, 2001, and 2002 in the amounts of $3,323,
$3,556, and $3,126, respectively, after decreasing petitioners’
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Last modified: May 25, 2011