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the note dated April 13, 1990. Petitioner also advanced $11,968
to Adult Fun on March 9, 1990, for remodeling. This advance was
reflected in the June 6, 1990, note.
In addition to the advances above, petitioner made the
following cash advances to Adult Fun:
Date Amount
May 2, 1990 $150
May 29, 1990 285
Aug. 8, 1990 15
Total 450
Petitioner added these three cash advances onto the note dated
April 13, 1990.
Petitioner did not require collateral, take back liens or
personal guarantees, or request to examine Adult Fun's books, tax
returns, or financial statements before or after making any of
the advances. On its books, petitioner recorded the advances as
loans. Adult Fun recorded the advances as debts.1 Adult Fun did
not make any payments on the Notes.
Adult Fun began a business under the name “Deja Vu Boutique”
sometime in May or June 1990. Shortly after it opened,
1 Adult Fun’s taxable year ended on Feb. 28. With the
exception of the advances and a $50 payable for State income
taxes, Adult Fun’s balance sheet on Feb. 28, 1991, listed no
liabilities. The balance sheet on Feb. 28, 1991, listed assets
of $20,724, which were the leasehold improvements mentioned
below. Those improvements were the only asset that Adult Fun had
reported on a yearend balance sheet since Feb. 28, 1987. Adult
Fun’s balance sheet on Feb. 28, 1987, listed total assets of
$1,077 and total liabilities of $106,192. Adult Fun listed paid-
in capital of $6,000 on each of its yearend balance sheets from
Feb. 28, 1987 to Feb. 28, 1991.
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