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The $90,000 Riley Transaction--Petitioner, during 1982, had
received $110,000 from the Mid-Continent corporations for alleged
reimbursement of preincorporation expenses. Petitioner did not
actually incur preincorporation expenses, but reported the
$110,000 as income on petitioners' 1982 joint Federal income tax
return. For 1983, petitioners claimed a $90,000 repayment to the
Mid-Continent corporations of the preincorporation expenses. The
amount is reflected on Schedule D by an entry that reported a
sale of petitioner's interest in Riley during December 1983 for
$90,000, and a purchase of the interest during November 1983 for
$67,500; a short-term capital gain of $22,500 is reported for the
transaction. In another part of petitioners' 1983 return, the
$90,000 is reflected as a repayment of reimbursed
preincorporation expenses and used to reduce other income.
Petitioner explains the Schedule D reporting of this
transaction was intended to reflect a contribution of Riley to
the Mid-Continent corporations. The Riley scenario is
convoluted. Initially, the $110,000 was taken from the Mid-
Continent corporations as reimbursement for preincorporation
expenses, when none was actually incurred. We surmise that this
approach was used to provide some tax benefit. The
"contribution" of Riley by petitioner and Roy, which was
characterized as a refund of the reimbursement, is without
substance. Petitioner and Roy each divided the 4,000 or so
customers of Riley and proceeded to earn income from selling
insurance to Riley customers. The only asset of Riley, with any
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