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going out of business and was indebted to INI for $417,978. The
accountants transferred the $417,978 of indebtedness to
petitioner by journal entries, such that after the transfer
Development was no longer indebted to INI, petitioner's
indebtedness to INI was increased by $417,978, and petitioner's
indebtedness to Development was reduced by $417,978.
Similarly, Development owed Carlsgate $82,132 at about the
time that Carlsgate was going out of business, and petitioner was
indebted to Development. On December 31, 1989, petitioner
"assumed" Development's debt to Carlsgate by making journal
entries. After the journal entries, Development was no longer
indebted to Carlsgate, petitioner owed Carlsgate $82,132, and his
indebtedness to Development was reduced by that same amount. On
that same day, petitioner incorrectly "paid" $59,369 of the
amount he owed Carlsgate by making creative journal entries that
offset the Accumulated Adjustments Account (AAA) against the loan
balance.4
On December 31, 1990, in anticipation of Carlsgate's
imminent demise, petitioner transferred $11,374 of the amount he
owed Carlsgate to INI by making journal entries. That is, after
the journal entries, his indebtedness to Carlsgate was reduced by
4 Petitioner first reduced the loan balance by offsetting
$74,397 against the AAA, but then reduced that offset by $15,028
to agree with his amended Schedule K-1 (Form 1120S). Thus, the
net offset was $59,369.
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