Estate of Robert G. Kluener, Deceased, Donald E. Hathaway, Co-executor and Charlotte J. Kluener - Page 16

            Third.  They argue that the sales proceeds were not used by APECO                             
            because other sources of funds were available to it.  Petitioners                             
            further contend that there was no intention to withdraw the sales                             
            proceeds from APECO when the horses were contributed and the                                  
            distribution of the sales proceeds was precipitated by events                                 
            that were unforeseen at the time of the transfer.                                             
                  Respondent's position is that, although the transaction was                             
            cast as a sale of the horses by APECO, the substance of the                                   
            transaction was that Mr. Kluener sold the horses using APECO as a                             
            conduit and that the gain realized on the sale therefore must be                              
            charged to him.  Respondent contends that Mr. Kluener had decided                             
            to sell the horses for personal reasons prior to transferring                                 
            them to APECO and that the sole purpose for transferring the                                  
            horses to APECO was to use its NOL's to avoid tax on the gain                                 
            realized on the sale.  Respondent maintains that Mr. Kluener kept                             
            control of the horses and the sales proceeds while they were                                  
            nominally held by APECO, concealing from the other officers and                               
            directors of APECO the fact that the transaction involving the                                
            horses was conducted in the name of APECO, as well as the e                                   
            xistence of the accounts in which the sales proceeds were held.                               
            Respondent notes that the sales proceeds were never used to fund                              
            APECO's operations, which instead were financed by loans from Mr.                             
            Kluener using funds from his bank accounts.  Respondent also                                  
            points to the distribution to Mr. Kluener of all of the sales                                 
            proceeds and earnings held in the name of APECO several months                                






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