                        T.C. Memo. 1997-324



                      UNITED STATES TAX COURT



          DOUGLAS R. AND JANE E. PRINCE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

      DOUGLAS R. PRINCE, D.D.S., M.S., P.C., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 22467-93, 8457-94.1          Filed July 15, 1997.



     Richard M. Kates, for petitioners.

     James S. Stanis, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined deficiencies in and

additions to petitioners' Federal income tax as follows:


1
     These cases were consolidated for purposes of trial,
briefing, and opinion.
                                          - 2 -

           Douglas R. and Jane E. Prince, docket No. 22467-93

                                                Additions to Tax
                               Sec.            Sec.            Sec.           Sec.
    Year    Deficiency      6651(a)(1)    6653(a)(1)(A)   6653(a)(1)(B)     6661(a)
                                                               1
    1987     $76,684         19,360           4,213                         19,171
1
 50 percent of the interest due on the deficiency.



Douglas R. Prince, D.D.S., M.S., P.C., docket No. 8457-94

                                                Additions to Tax
  Taxable                                      Secs.            Secs.
Year Ending                     Sec.        6653(a)(1)/      6653(a)(2)/      Sec.
  June 30       Deficiency   6651(a)(1)    6653(a)(1)(A)    6653(a)(1)(B)   6661(a)
                                                                   1
     1986        $24,683         -                1,234                       6,171
                                                                   1
     1987         40,087       2,067              2,067                      10,022


                                                Additions to Tax
  Taxable                                       Secs.           Secs.
Year Ending      Increase       Sec.         6653(a)(1)/     6653(a)(2)/      Sec.
  Dec. 31         in Tax     6651(a)(1)     6653(a)(1)(A)   6653(a)(1)(B)   6661(a)
                                                                   1
     1987         $7,348         -                  367                        -
     1988         29,345       2,935              1,467            -         7,336
1
 50 percent of the interest due on the deficiency.


           Unless otherwise indicated, all section and Code references

are to the Internal Revenue Code as in effect for the years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.
                              - 3 -

     After concessions,2 the issues to be decided are:

A.   Issues With Respect to Petitioners Douglas R. Prince and
     Jane E. Prince3

     1.   Whether petitioners Douglas R. Prince and Jane E.

Prince have substantiated their claimed deduction for certain

interest for their 1988 taxable year as a part of a loss

carryback to their 1987 taxable year;

     2.   whether a certain loan from a pension plan is

includable in their gross income pursuant to section 72(p) for

their 1988 taxable year;




2
     The notice of deficiency that was sent to petitioners
Douglas R. Prince and Jane E. Prince listed adjustments to income
for their taxable years 1986, 1987, and 1988. Respondent,
however, determined a deficiency in their income for only taxable
year 1987. Prior to and during trial, the parties stipulated all
of the adjustments to taxable year 1986 and most of the
adjustments to taxable years 1987 and 1988. We note that some of
the stipulations are based upon amounts that are different than
those set forth in the notice of deficiency.
     The notice of deficiency that was sent to petitioner Douglas
R. Prince, D.D.S., M.S., P.C. listed adjustments to income for
its taxable years ended June 30, 1986; June 30, 1987; Dec. 31,
1987; and Dec. 31, 1988. The parties stipulated most of the
adjustments for the taxable years in issue. Additionally,
respondent conceded that petitioner Douglas R. Prince, D.D.S.,
M.S., P.C. is entitled to additional recovery deductions pursuant
to section 168, which were not included in the notice of
deficiency.
3
     In their petition, petitioners disputed respondent's
determinations concerning the alternative minimum tax for taxable
year 1987 and the percentage limitations on passive activity
losses for taxable years 1987 and 1988. Petitioners, however,
make no argument on brief concerning these issues. Consequently,
we consider such issues to have been conceded. Rybak v.
Commissioner, 91 T.C. 524, 566 (1988).
                                - 4 -

     3.     whether they are liable for additions to tax pursuant

to sections 6651, 6653, and 6661 for their 1987 taxable year.

B.   Issues With Respect to Petitioner Douglas R. Prince, D.D.S.,
     M.S., P.C.

     1.     Whether certain payments made by petitioner Douglas R.

Prince, D.D.S., M.S., P.C. to petitioner Douglas R. Prince are

deductible as compensation expenses pursuant to section 162; and

     2.     whether petitioner Douglas R. Prince D.D.S., M.S., P.C.

is liable for additions to tax pursuant to sections 6651, 6653,

and 6661.

                          FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.    The parties' stipulations of facts are incorporated

herein by reference and are found as facts in the instant case.

     During the relevant taxable years, petitioner Douglas R.

Prince (hereinafter individually referred to as petitioner) owned

all of the stock of petitioner Douglas R. Prince, D.D.S., M.S.,

P.C., a professional corporation (hereinafter referred to as the

corporation) that was organized pursuant to the laws of the State

of North Dakota.

     At the time the petition in docket No. 22467-93 was filed,

petitioners Douglas R. Prince and Jane E. Prince (hereinafter

jointly referred to as petitioners) resided in DuPage County,

Illinois.    At the time the petition in docket No. 8457-94 was

filed, the corporation's principal office was at 358 East First
                                - 5 -

Street, Dickinson, North Dakota.    The corporation's taxable year

was a fiscal year ending June 30 for taxable years ending June

30, 1986 and 1987.    During 1987, however, the corporation changed

its taxable year to a calendar year.

       During the relevant taxable years, petitioner was an

orthodontist who maintained, through the corporation, an

orthodontic practice with locations in Dickinson, North Dakota;

Williston, North Dakota; Sidney, Montana; Glendive, Montana; and

Miles City, Montana.    Petitioner was the only orthodontist in the

corporation's orthodontic practice, for which he was paid a

salary by the corporation.

       In its books and records, the corporation maintained a "Loan

and Exchange" account receivable from petitioner (the loan and

exchange account).    The corporation made payments to and for the

benefit of petitioner for both corporate and personal expenses

and increased the amount in the loan and exchange account to

reflect the amounts of such payments.    Additionally, the

corporation made certain payments to and for the benefit of

petitioner that were not from the loan and exchange account.    At

the end of the corporation's taxable year, the corporation's

accountant classified payments from the loan and exchange account

as either corporate expenses or personal expenses.    Generally,

amounts that were classified as personal expenses were treated as

compensation to petitioner and were reported on petitioner's Form

W-2.
                                     - 6 -

     On its Federal income tax returns and amended returns, the

corporation claimed deductions for compensation payments to




petitioner as follows:

  Taxable Year Ending           Original Return       Amended Return

     June   30,   1986             $446,781              no change
     June   30,   1987              379,694              $364,694
     Dec.   31,   1987               49,782               181,718
     Dec.   31,   1988              430,002       no amended return filed

On their Federal income tax returns and amended return,

petitioners included in their gross income compensation payments

from the corporation as follows:

     Taxable Year               Original Return       Amended Return

         1986                      $446,781              $253,167
         1987                       344,316       no amended return filed
         1988                       430,002       no amended return filed

     During 1988, petitioner sold a rental building in Yorkville,

Illinois (the Yorkville building).           Petitioner was personally

liable for a loan secured by the Yorkville building (the

Yorkville loan).         At the time of the sale, the interest on the

Yorkville loan was in arrears.         On their 1988 Federal income tax

return, petitioners reported gain on the sale of the Yorkville

building and claimed on their Schedule E an interest expense on

the Yorkville loan in the amount of $74,723.           In the notice of

deficiency, respondent determined a loss on the sale of the
                                - 7 -

Yorkville building but disallowed the interest expense claimed by

petitioners.

     Prior to and continuing through the relevant taxable years,

the corporation maintained the Douglas R. Prince, D.D.S., M.S.,

P.C. Pension Plan and Trust (the pension plan), in which

petitioner was a participant.   The pension plan was a qualified

trust within the meaning of section 401(a).

     On or about March 14, 1986, the pension plan made a loan in

the amount of $50,000 to petitioner (the original loan).   The

original loan, which was secured by petitioner's vested benefit

in the pension plan, was to be repaid on April 1, 1988, with

interest at the rate of 13.75 percent per annum.   On the due date

of the original loan, the principal and interest on the original

loan were not paid but were instead rolled over into a new loan

(the renewed loan).   Neither the original loan nor the renewed

loan contained a provision for "level amortization" of the

principal.   At all relevant times, the present value of one-half

of petitioner's "accrued benefit" under the pension plan exceeded

$100,000.

     Petitioners did not include the original loan or the renewed

loan in their gross income on their Federal income tax returns

for the years in issue.   Respondent determined that the renewed

loan did not provide for "level amortization" as required by

section 72(p)(2)(C) and concluded that the renewed loan did not

qualify for the section 72(p)(2)(A) exception.   Consequently,
                               - 8 -

respondent determined that the renewed loan was a taxable

distribution to petitioners for their 1988 taxable year pursuant

to section 72(p)(1)(A).

     On its Federal income tax returns for the taxable years in

issue, the corporation characterized certain payments that it

made to and for the benefit of petitioner from the loan and

exchange account and another account as business deductions.

Respondent disallowed certain deductions on the grounds that the

corporation did not establish a business purpose for the

payments.   Consequently, respondent recharacterized the payments

as constructive dividends that were not deductible to the

corporation (the disallowed corporate payments).4

                              OPINION

     The first issue we decide is whether the corporation is

entitled to deduct certain disallowed corporate payments as

compensation expenses pursuant to section 162.5   The corporation

contends that the disallowed corporate payments are compensation

for petitioner's services and, therefore, are deductible pursuant




4
     See appendix for a listing of the disallowed corporate
payments and the parties' concessions.
5
     Respondent has conceded that the corporation is entitled to
deduct certain disallowed corporate payments and to depreciate
certain other disallowed corporate payments. The corporation
also has conceded certain disallowed corporate payments.
Accordingly, the corporation seeks to deduct all remaining
disallowed corporate payments. See appendix.
                                - 9 -

to section 162.   The corporation bears the burden of proof.   Rule

142(a).

     Section 162(a)(1) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including "a reasonable

allowance for salaries or other compensation for personal

services actually rendered".    To deduct payments as compensation

expenses pursuant to section 162, the taxpayer must establish

that the payments are:   (1) Reasonable, and (2) intended to be

payments purely for services.    Elliotts, Inc. v. Commissioner,

716 F.2d 1241, 1243 (9th Cir. 1983), revg. and remanding on

another issue T.C. Memo. 1980-282; Paula Constr. Co. v.

Commissioner, 58 T.C. 1055, 1058 (1972), affd. without published

opinion 474 F.2d 1345 (5th Cir. 1973); Electric & Neon, Inc. v.

Commissioner, 56 T.C. 1324, 1340 (1971), affd. without published

opinion 496 F.2d 876 (5th Cir. 1974); sec. 1.162-7(a), Income Tax

Regs.   Whether the taxpayer has shown the requisite intent to

treat the payments as compensation is a factual question to be

decided on the basis of the particular facts and circumstances.

Electric & Neon, Inc. v. Commissioner, supra.    "Where officer-

shareholders, who are in control of a corporation, set their own

compensation, careful scrutiny is required to determine whether

the alleged compensation is in fact a distribution of profits."

Home Interiors & Gifts, Inc. v. Commissioner, 73 T.C. 1142, 1156

(1980).
                               - 10 -

     Applying the foregoing requirements, we must decide whether

the corporation has established that it intended to treat the

disallowed corporate payments as compensation for petitioner's

services.   The corporation contends that it mistakenly treated

the disallowed corporate payments that were made from the loan

and exchange account as corporate expenses instead of personal

expense payments.   It argues that, consistent with its

established practice of treating personal expenses as

compensation to petitioner, the disallowed corporate payments

should be treated as compensation to petitioner.    The corporation

argues that its intent is not altered by the fact that the

accountant made a mistake in characterizing the payments.

Additionally, the corporation contends that petitioner generated

all of the income of the corporation and that all of the

disallowed corporate payments therefore should be treated as

compensation to petitioner.

     Based on our review of the record before us, we conclude

that the corporation has not established that it intended to

treat the disallowed corporate payments as compensation for

petitioner's services when the payments were made.    The

corporation's arguments on brief that the disallowed corporate

payments were characterized incorrectly and that petitioner

generated all of the corporation's income do not establish the

requisite intent to treat the corporate payments as compensation

for petitioner's services.    The question is whether the
                              - 11 -

corporation intended the disallowed corporate payments to be

compensation to petitioner when they were made.    Paula Constr.

Co. v. Commissioner, supra at 1059.    Moreover, we decide the case

in light of what was done, not what might have been done.     Id. at

1060 (and cases cited therein).

     The record in the instant case lacks any credible evidence

of the corporation's intent to treat the disallowed corporate

payments as compensation for petitioner's services when the

payments were made.   For the taxable years in issue, the

corporation characterized certain amounts other than the

disallowed corporate payments on its Federal income tax returns

and petitioner's Forms W-2 as compensation to petitioner, which

compensation was included as compensation income on petitioners'

Federal income tax returns.   However, neither books or records of

the corporation nor testimony were offered to establish that the

corporation intended to treat the disallowed corporate payments

as compensation for petitioner's services.   Moreover, the

disallowed corporate payments were not characterized as payments

of compensation to petitioner on the corporation's Federal income

tax returns or on the Forms W-2 that it furnished to petitioner.

Finally, the disallowed corporate payments were not reported as

income on petitioners' Federal income tax returns.   Based on the

record in the instant case, we are not persuaded that the

corporation intended to treat the disallowed corporate payments

as compensation for petitioner's services when the payments were
                              - 12 -

made.6   Accordingly, we hold that the corporation is not entitled

to deduct the disallowed corporate payments as compensation

expenses pursuant to section 162 for the taxable years in issue.

     We next consider the issue concerning petitioners' interest

expense deduction for the Yorkville loan.   On Schedule E of their

1988 Federal income tax return, petitioners claimed an interest

expense on the Yorkville loan in the amount of $74,723, which

respondent disallowed.7   Respondent contends that petitioners did

not substantiate that interest on the Yorkville loan was paid.

Alternatively, respondent argues that petitioners did not prove

that the interest on the Yorkville loan was paid from the




6
     As we have concluded that petitioners have not established
the requisite intent, we need not address the requirement that
the payment be reasonable.
7
     At trial, the parties consented to the trial of the issue of
whether petitioners are entitled to deduct the interest expense
on the Yorkville loan for taxable year 1988. In the notice of
deficiency, respondent disallowed the interest expense in the
adjustment to the category "Rental Loss (Schedule E)" for taxable
year 1988. We note that the notice of deficiency transposed the
names of the adjustments to income entitled "Constructive
Dividend" and "Rental Loss (Schedule E)". Additionally, we note
that, during the course of the proceedings in this Court,
respondent asserted that the amounts in issue in the category
"Rental Loss (Schedule E)" should be increased for taxable years
1987 and 1988, but did not file a motion for leave to amend the
answer. The parties' stipulations as to taxable years 1987 and
1988 are based upon the increased amounts, which are deemed
amendments to the pleadings pursuant to Rule 41(b). Nonetheless,
as the interest expense on the Yorkville loan was disallowed in
the notice of deficiency, petitioners bear the burden of
establishing that respondent's determination was erroneous. Rule
142(a).
                               - 13 -

proceeds of the sale of the Yorkville building.   Petitioners

argue that they have substantiated their interest expense.

     To substantiate their interest payment on the Yorkville loan

petitioners rely on petitioner's testimony and an interest

statement.   At trial, petitioner testified that, at the closing

of the sale on the Yorkville building, the interest on the loan,

which was in arrears, was paid from the proceeds from the sale.

Additionally, the record contains a copy of a statement from

First Midwest Bank/Illinois that states, in part:    "the interest

paid on your loan account in 1988 was $74,722.55."   Respondent

concedes that the loan account related to the Yorkville loan.

Based on the foregoing, we are satisfied that the interest on the

Yorkville loan was paid.

     Respondent's contention that petitioners did not prove that

the proceeds from the sale of the Yorkville building were used to

make the interest payment is misplaced.   Where there is no

allegation that the funds to pay the interest were borrowed from

the creditor, there is no requirement that the source of the

funds used to make the interest payment be traced.   Respondent

has not cited, and we are unable to find, any authority to the

contrary.    Consequently, the failure of petitioners to establish

that the sale of the Yorkville building produced sufficient

proceeds to pay off the Yorkville loan is immaterial.   The only

fact petitioners must establish is that the interest on the

Yorkville loan was paid, and that fact is shown by petitioner's
                              - 14 -

uncontroverted testimony which was corroborated by the interest

statement from the bank.   Consequently, we conclude that

petitioners are entitled to an interest expense deduction in the

amount of $74,722.55 for their taxable year 1988.

     The next issue to be decided is whether the loan from the

pension plan is a taxable distribution to petitioners pursuant to

section 72(p)(1)(A).8   As stated in our findings, on or about

March 14, 1986, the pension plan made a loan to petitioner in the

amount of $50,000, which was to be repaid on April 1, 1988, with

interest at the rate of 13.75 percent per annum (the original

loan).   On the due date of the original loan, the principal and

interest on the original loan were not paid but were instead

rolled over into a new loan (the renewed loan).   Neither the

original loan nor the renewed loan contained a provision for

"level amortization" of the principal.   At all relevant times,



8
     Respondent raised this issue at trial, and petitioners
waived their objection to the trial of the issue. Consequently,
the issue was tried by consent pursuant to Rule 41(b).
Respondent argues that, as the pension issue affects the loss
carryback from petitioners' 1988 taxable year to their 1987
taxable year that petitioners raised at trial, petitioners bear
the burden of proof as to the issue. Additionally, respondent
contends that, as the notice of deficiency treated the accrued,
unpaid interest on the pension plan loan as a taxable
distribution to petitioners, the issue is not a new matter for
which respondent bears the burden of proof pursuant to Rule
142(a). We disagree. In the notice of deficiency, the principal
amount of the loan is not included as an adjustment to
petitioners' income. Consequently, we conclude that the issue is
a "new matter" within the meaning of Rule 142(a), on which issue
respondent bears the burden of proof.
                              - 15 -

the present value of one-half of petitioner's "accrued benefit"

under the pension plan exceeded $100,000.

     Section 402(a) provides that, with exceptions not here

relevant, distributions from a qualified plan are taxable to the

distributee, in the taxable year of the distributee in which

distribution occurs, pursuant to section 72.   Section 72(p)(1)(A)

provides the general rule that loans from a qualified employer

plan to plan participants or beneficiaries are treated as taxable

distributions.   Section 72(p)(2)(A), however, provides an

exception to the general rule for any loan to the extent that

such loan (when added to the outstanding balance of all other

loans from the plan) does not exceed the lesser of:   (1) $50,000

(reduced under conditions not here relevant), or (2) the greater

of one-half of the present value of participant's "nonforfeitable

accrued benefit" under the plan or $10,000.9   The exception

provided in section 72(p)(2)(A) does not apply unless:   (1) The

loan, by its terms, is required to be repaid within 5 years, sec.

72(p)(2)(B), and (2) "substantially level amortization of such

9
     The parties stipulated that, at all relevant times, one-half
of the present value of petitioner's "accrued benefit" exceeded
$100,000. We, however, conclude that the stipulation is not
helpful as sec. 72(p)(2)(A)(2) takes into account only the
participant's nonforfeitable accrued benefit. We note that, in
any case, the sec. 72(p)(2)(A) exception is limited to loans
(when added to the outstanding balance of all other loans from
the plan) that do not exceed $50,000. The lesser of (1) $50,000
or (2) the greater of the two specified amounts, sec.
72(p)(2)(A), is an amount equal to $50,000 or less. Accordingly,
loans that exceed $50,000 do not qualify for the sec. 72(p)(2)(A)
exception.
                              - 16 -

loan (with payments not less frequently than quarterly) is

required over the term of the loan", sec. 72(p)(2)(C).   The

requirement of section 72(p)(2)(C) applies to loans made,

renewed, renegotiated, modified, or extended after December 31,

1986.   Tax Reform Act of 1986, Pub. L. 99-514, sec. 1134(b), 100

Stat. 2085, 2484.

     Respondent, citing petitioners' concession that the renewed

loan does not provide for "level amortization", argues that the

renewed loan does not qualify for the section 72(p)(2)(A)

exception because it does not meet the section 72(p)(2)(C)

requirement of "level amortization".   Consequently, respondent

contends that the renewed loan is a taxable distribution to

petitioners pursuant to section 72(p)(1)(A).   Petitioners,

however, merely argue that "There is not enough in the record to

cause the $50,000 loan to constitute taxable income to the

petitioners under Section 72(p)."

     Contrary to respondent's argument, section 72(p)(2)(C)

provides that the exception pursuant to section 72(p)(2)(A) does

not apply unless the loan requires substantially level

amortization.   The phrase "substantially level amortization" is

less stringent than the phrase "level amortization".   Although

petitioners conceded that the renewed loan did not provide for

"level amortization", respondent must still establish that the

renewed loan did not have "substantially level amortization" in

order to prevent the application of the exception contained in
                                - 17 -

section 72(p)(2)(A).   Nonetheless, we conclude that, even if

respondent has not established that the renewed loan did not have

substantially level amortization, the renewed loan is a taxable

distribution to petitioners pursuant to section 72(p)(1)(A)

because the record establishes that the renewed loan exceeded

$50,000.   At trial, the parties orally stipulated that, when the

original loan was due in 1988, the principal amount due; i.e.,

$50,000, and interest due thereon were not paid but instead were

rolled over into the renewed loan.       Accordingly, as the amount of

the renewed loan was the sum of $50,000 plus the interest that

had accrued on the original loan, the amount of the renewed loan

necessarily exceeded $50,000.    Consequently, we conclude that the

renewed loan does not meet the requirement of section

72(p)(2)(A), and we hold that the renewed loan is a taxable

distribution to petitioners pursuant to section 72(p)(1)(A) for

their 1988 taxable year.10

     Lastly, we turn to the additions to tax determined by

respondent.   In the notices of deficiency, respondent determined

that petitioners and the corporation are liable for additions to

tax pursuant to sections 6651, 6653, and 6661.      Petitioners and


10
     To the extent that a net operating loss results from the
parties' stipulations, the allowance of the Yorkville interest
expense deduction, and the inclusion of the renewed loan from the
pension plan in petitioners' gross income, petitioners shall be
entitled to a loss carryback from their 1988 taxable year to
their 1987 taxable year, which the parties must calculate in the
Rule 155 computations that we order below.
                              - 18 -

the corporation bear the burden of proving that respondent's

determinations of additions to tax are erroneous.      Rule 142(a).

     Neither petitioners nor the corporation objected to

respondent's requested ultimate findings of fact that the

underpayments of tax by petitioners and by the corporation "were

due to negligence and/or intentional disregard of rules and

regulations."   Additionally, they make no argument on brief

concerning the additions to tax pursuant to section 6653.

Accordingly, we consider petitioners and the corporation to have

conceded the additions to tax pursuant to section 6653.

     Petitioners and the corporation argue that, to the extent

that the threshold requirements of section 6661 are not met, the

section 6661 addition to tax does not apply.       Neither petitioners

nor the corporation makes any argument concerning the additions

to tax pursuant to section 6651.    Consequently, we consider the

additions to tax pursuant to sections 6651 and 6661 (to the

extent that the threshold requirements are met) to have been

conceded.   Rybak v. Commissioner, 91 T.C. 524, 566 (1988).

Accordingly, we sustain respondent's determination of additions

to tax for petitioners and the corporation.

     To reflect the foregoing,


                                      Decisions will be entered

                                 under Rule 155.
                                - 19 -

                              APPENDIX


Taxable Year Ending June 30, 1986

    Amount of           Purpose of
deduction claimed    deduction claimed
by the corporation   by the corporation   Concessions and Arguments

    $17,695          other deduction      The corporation conceded
                                          entire amount to be the cost
                                          of acquiring paintings and not
                                          a deductible business expense
                                          to the corporation; respondent
                                          allowed additional
                                          depreciation expenses.

      5,497          other deduction      The corporation conceded
                                          entire amount to be
                                          petitioner's personal real
                                          estate expense and contends
                                          that entire amount is
                                          deductible as compensation to
                                          petitioner.

      1,728          other deduction      The corporation conceded
                                          entire amount to be
                                          petitioner's personal
                                          educational expense and
                                          contends that entire amount is
                                          deductible as compensation to
                                          petitioner.

      8,775          other deduction      The corporation conceded
                                          4387.00 [sic] to be not
                                          deductible for the purpose
                                          claimed and contends that such
                                          amount is deductible as
                                          compensation to petitioner;
                                          respondent conceded 4387.50.

      4,500          legal and            The corporation conceded 1,000
                     professional fees    to be not deductible for the
                                          purpose claimed and contends
                                          that such amount is deductible
                                          as compensation to petitioner;
                                          respondent conceded 3,500.

        894          repairs/supplies     The corporation conceded 594
                                          to be not deductible for the
                                          purpose claimed and contends
                                          that such amount is deductible
                                          as compensation to petitioner;
                                          respondent conceded 300.

        600          professional         The corporation conceded 600
                                - 20 -
                     education expenses   to be petitioner's personal
                                          business expense and contends
                                          that such amount is deductible
                                          as compensation to petitioner.


        800          consulting fees      The corporation conceded 400
                                          to be petitioner's personal
                                          business expense and contends
                                          that such amount is deductible
                                          as compensation to petitioner;
                                          respondent conceded 400.

Taxable Year Ending June 30, 1987

    Amount of           Purpose of
deduction claimed    deduction claimed
by the corporation   by the corporation   Concessions and Arguments

    $22,622          other deduction      The corporation conceded
                                          entire amount to be
                                          petitioner's personal real
                                          estate expense and contends
                                          that entire amount is
                                          deductible as compensation to
                                          petitioner.

     38,979          other deduction      The corporation conceded
                                          19,489 to be not deductible
                                          for the purpose claimed and
                                          contends that such amount is
                                          deductible as compensation to
                                          petitioner; respondent
                                          conceded 19,489. [1-dollar
                                          mathematical error by the
                                          parties]

        823          real estate taxes    Respondent conceded entire
                                          amount.

      3,500          legal and            The corporation conceded
                     professional fees    entire amount to be
                                          petitioner's personal expense
                                          and contends that entire
                                          amount is deductible as
                                          compensation to petitioner.

      4,600          consulting fees      The corporation conceded 1,400
                                          to be petitioner's personal
                                          expense and contends that such
                                          amount is compensation to
                                          petitioner; respondent
                                          conceded 3,200.

      5,000          furniture and        The corporation conceded
                     fixtures             entire amount to be not
                                          deductible; respondent allowed
                                - 21 -
                                          additional ACRS deductions
                                          pursuant to section 168.




Taxable Year Ending December 31, 1987

    Amount of           Purpose of
deduction claimed    deduction claimed
by the corporation   by the corporation   Concessions and Arguments

    $8,075           other deduction      The corporation conceded
                                          entire amount to be
                                          petitioner's personal real
                                          estate expense and contends
                                          that all is deductible as
                                          compensation to petitioner.

     8,078           other deduction      The corporation conceded 4,039
                                          to be not deductible for the
                                          purpose claimed and contends
                                          that such amount is deductible
                                          as compensation to petitioner;
                                          respondent conceded 4,039.50
                                          [sic].

     9,098           real estate taxes    The corporation conceded 3,359
                                          to be petitioner's personal
                                          real estate taxes and contends
                                          that such amount is deductible
                                          as compensation to petitioner;
                                          respondent conceded 5,739.


Taxable Year Ending December 31, 1988

    Amount of           Purpose of
deduction claimed    deduction claimed
by the corporation   by the corporation   Concessions and Arguments

   $3,292            other deduction      The corporation conceded
                                          entire amount to be
                                          petitioner's personal real
                                          estate expense and contends
                                          that all is deductible as
                                          compensation to petitioner.

    8,512.93         other deduction      The corporation conceded
                                          entire amount to be the cost
                                          of acquiring paintings;
                        - 22 -
                                 respondent allowed additional
                                 depreciation expenses.

68,713.07   other deduction      The corporation conceded
                                 50,361 to be not deductible
                                 for the purpose claimed and
                                 contends that such amount is
                                 deductible as compensation to
                                 petitioner; respondent
                                 conceded 18,352.




9,961       legal and            The corporation conceded
            professional fees    6,161.35 to be an amount that
                                 was wire transferred to
                                 petitioner and 3,800 to be
                                 petitioner's personal business
                                 and investment expense. The
                                 corporation contends that
                                 entire amount is deductible as
                                 compensation to petitioner.

5,064       repairs/supplies     The corporation conceded
                                 entire amount to be payments
                                 by the corporation to Western
                                 Savings Credit Union and
                                 contends that entire amount is
                                 deductible as compensation to
                                 petitioner.

1,861       insurance            The corporation conceded
                                 entire amount to be
                                 petitioner's personal real
                                 estate insurance expense and
                                 contends that entire amount is
                                 deductible as compensation to
                                 petitioner.
