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had $800,000 of unrecorded liabilities which should have been
offset against the S corporation's earnings and profits.
Respondent did not reduce the earnings and profits by any portion
of the unrecorded liabilities in the notice of deficiency
determination.
Petitioners filed their 1988 joint Federal income tax return
after October 31, 1989, and they had not requested an extension
of time in which to file their return. Petitioners conceded the
following adjustments: Resthaven's travel and entertainment
expenses of $14,937, $14,828, and $47,928 for 1987, 1988, and
1989, respectively; a $15,400 reduction in Resthaven's cost of
goods sold; Resthaven's equipment lease expense of $1,183,
$8,882, and $8,076 for 1987, 1988, and 1989, respectively;
Resthaven's vehicle insurance expense of $412, $933, and $1,805
for 1987, 1988, and 1989, respectively; disallowed medical
expense for 1987; and an adjustment to miscellaneous itemized
deductions for 1987.
OPINION
Bad Debt
Resthaven lent petitioner's friend, Mr. Kamas, $110,000 in
December 1986. Petitioner caused his corporation to lend Kamas
$110,000 so that Kamas could participate in the building of a
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