Victor I. Rosenberg and Deborah I. Rosenberg - Page 11




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                    Year      Liabilities         Equity                              
                    1987     $887,937             ($204,556)                          
                    1988       954,758            (315,821)                           
          H.   Tax Returns                                                            
               On its 1986 return, Cabana Boy reported that loans from                
          shareholders were $391,045 at the beginning of 1986 and $137,102            
          at the end of 1986.  Hyman prepared Cabana Boy's Forms 1120, U.S.           
          Corporation Income Tax Returns, for its taxable years ending                
          November 30, 1987 through 1990.  On June 22, 1995, Mrs. Rosenberg           
          signed Cabana Boy's corporate tax returns as president.                     
          Petitioners did not treat their advances to Cabana Boy as loans             
          or claim bad debt deductions on their individual income tax                 
          returns.                                                                    
          I.   Dissolution of Cabana Boy                                              
               Cabana Boy was dissolved on March 24, 1993.  Petitioners               
          never demanded repayment of any money spent on the Cabana Boy               
          project.                                                                    
                                       OPINION                                        
               Petitioners offer several alternative theories to support              
          the deduction of their advances to Cabana Boy:  (A) The advances            
          were debt, not equity; (B) their advances to Cabana Boy were                
          business expenses of Cabana Boy which petitioners may deduct as             
          if Cabana Boy were an S corporation, or they were Cabana Boy’s              
          alter ego; (C) petitioners may deduct the advances under section            
          212 as expenses to produce income; and (D) petitioners may deduct           






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