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assumption to be flawed--none of the related entities were in fact
liquidated, and there is no evidence to suggest that a liquidation
was contemplated. Rather, the record indicates that each of the
related entities was a going concern. Thus, in our opinion, Mr.
Lamprecht's determination as to the financial position of the
related entities does not correctly reflect the entities' ability
to pay their accounts payable to petitioner.
We believe the rebates were made solely to reduce taxes for
the Kirkham family as a whole. We are mindful that current tax law
provides that in order for losses of an S corporation, such as
Kapsco, to pass through to its shareholders, the shareholders must
have sufficient bases in their stock and debt to absorb the loss.
Sec. 1366(d)(1). In the instant case, there is no evidence that
Kapsco's shareholders had sufficient bases in 1991 to absorb
Kapsco's losses before the rebates.
It would appear that it was financially advantageous for the
losses that otherwise would have gone to the Kapsco shareholders
(the Kirkham family) to instead be used to reduce petitioner's
income.
Similarly, before the rebates, NPC showed losses of ($56,899)
and ($113,993) in fiscal years 1991 and 1992, respectively. A
review of NPC's original Federal income tax returns for those years
indicates that these losses would have gone unused in the years at
issue.
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