- 27 -
States v. Scornavacco's Restaurant, Inc., 528 F.2d 19, 23 (7th
Cir. 1975) (citing with approval United States v. Theodore, 479
F.2d 749, 753 (4th Cir. 1973)). Petitioner consistently treated
GAPS as an incorporated entity beginning in 1986. Petitioner
also caused corporate tax returns to be filed during the prior
periods when he now argues GAPS was not in existence. On its
1989 pro forma tax return, GAPS claimed, and respondent allowed,
a net operating loss deduction carried forward from its 1988
return. Petitioner held GAPS out as a corporation. Therefore,
regardless of the status of GAPS under Illinois law for the
period January-February 1989, we will treat GAPS as a corporation
for Federal income tax purposes for the entire calendar year.
Petitioners have also failed to provide evidence of how
expenses and distributions should be allocated between the sole
proprietorship and the corporation. Therefore, we will make no
adjustment to the amount of GAPS's earnings and profits, or
GAPS's corporate distributions, based on petitioners' corporate
existence argument. In light of petitioners' failure to prove
otherwise, we accept respondent's calculations of the 1989
earnings and profits of both JJM and GAPS.
Under section 301(c)(2), the amount of distributions in
excess of earnings and profits is a non-taxable return of capital
to the extent of petitioner’s basis in the stock. We therefore
must determine petitioner’s basis in the stock of his
Page: Previous 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 NextLast modified: May 25, 2011