Carl E. Jones and Elaine Y. Jones - Page 12

            Respondent determined that during 1989, the reported increases                            
            (debits) to the loan account totaled $537,683.  The account was                           
            increased for such diverse items as cash withdrawals of $209,223                          
            that were recorded as loans,5 Development's assumption of                                 
            petitioner's $98,753 of indebtedness to Winterchase, and $39,038                          
            of capitalized interest.6                                                                 
            Petitioner also recorded items that decreased the account                                 
            (credits).  Petitioner had credited the account for, among other                          
            items, $237,269 of cash that petitioner paid into the company,                            
            the reclassification of $116,395 of the loans as petitioner's                             
            salary, and petitioner's assumption of Development's                                      
            indebtedness.  Respondent disallowed $490,402 of these credit                             
            items, and allowed credits totaling $391,195, which respondent                            
            applied to reduce the beginning balance of the loan account, not                          
            to offset the increases recorded during 1989.                                             
                  Respondent determined that the alleged shareholder loans                            
            were not bona fide but actually were disguised distributions.                             
            Accordingly, respondent reduced the loan account balance for                              
            $39,038 of capitalized interest and increased petitioners' gross                          
            income for $307,976, the amount of the disguised distributions.                           

                  This amount includes political contributions of $1,500 that                         
            Development paid on petitioner's behalf.                                                  
                  Development charged petitioner interest on the alleged                              
            loans, and when petitioner did not pay the interest due,                                  
            Development capitalized it by debiting the loan account for the                           
            unpaid amount.                                                                            

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