that APECO is the true seller, it would be charged with the gain
realized on the sale of the horses, and no tax would be due
because APECO's substantial NOL carryforwards would offset that
gain. Moreover, because APECO had no current or accumulated
earnings and profits at the time the sales proceeds and the
earnings accumulated on them were distributed to Mr. Kluener, the
distribution would be treated as a nontaxable return of capital
and not as a taxable dividend. If we decide that Mr. Kluener is
the true seller, he would be charged with the gain on the sale of
the horses, and an additional amount of income tax would be due
from petitioners.
Petitioners contend that, on or about August 1, 1989, Mr.
Kluener transferred title to the horses to APECO in a transaction
intended to meet the requirements of section 351(a). Mr. Kluener
did not negotiate or contract to sell the horses prior to the
transfer, but, subsequent to the transfer, the horses were sold
at auction or otherwise disposed of. The sales proceeds were
paid to APECO, which reported the sales for tax purposes.
Petitioners acknowledge that the form of the transaction was
designed to use APECO's NOL's to shelter the gain realized on the
sale of the horses but argue that the transfer was for a
legitimate business purpose. According to petitioners, the
purpose for the transfer of the horses was to provide APECO with
a source of funds for the development of the Planatronic, and the
horses were the only asset Mr. Kluener could contribute to APECO
without diminishing his interest-paying capability to Fifth
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