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There appears to be no dispute between the parties that there
is a $3,665 discrepancy between the amount reported as Schedule K-
1 nonpassive income from Dr. Derby's wholly owned professional (S)
corporation, Charles A. Derby, M.D., Inc. (the corporation), on
the Derbys' 1994 Schedule E ($4,209) and the amount of ordinary
income actually listed on the corporation's 1994 Schedule K-1
($7,874). During the trial, Dr. Derby testified as follows
regarding the discrepancy:
At the close of the year, I had -- I was in the
process of dissolving the "S" corporation, and one of
the reconciliations that was necessary was there were a
-- I had a petty cash drawer and in it there were
receipts. And there was one principal receipt that was
for the -- my computer that I had purchased earlier in
the year. It was around 2,600 -- 2,700. And then
around a thousand dollars of petty cash receipts that
were money from my own personal pocket that had been
utilized by the "S" corporation, and in dissolving the
"S" corporation, I think that's where the discrepancy.
Now, I tried to get in touch with my accountant,
Mr. Kramer, to go over this with him, and I just wasn't
able to do that, and I don't have specific receipts for
this at this particular time, but that's my best
recollection of the -- what the discrepancy was.
Dr. Derby further testified that the corporation reimbursed him
for the computer and the other items at the time of its
dissolution in late 1994. Thus, it is Dr. Derby's position that
he, in effect, made a constructive loan to the corporation of the
amount in question by personally incurring expenses deemed to be
incurred by the corporation with the constructively borrowed funds
(which were reimbursed to Dr. Derby upon dissolution of the
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