John M. and Rita K. Monahan - Page 3

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          the discussion that follows.  Petitioners bear the burden of                
          proof on all questions of fact.  Rule 142(a).                               


          I.  Background                                                              
               Petitioners resided in Seattle, Washington, when the                   
          petition in this case was filed.                                            
               Petitioner is a lawyer specializing in corporate and                   
          international trade law with emphasis in tax planning and complex           
          corporate transactions.  Petitioner received an LL.M. (with                 
          emphasis in taxation) from New York University School of Law.               
               Petitioners are calendar year taxpayers.                               
          II.  Interest Payments Credited to Aldergrove's Bank Account                
               A.  Introduction                                                       
                    1.  Aldergrove                                                    
               Aldergrove Investments Co. (Aldergrove), was a partnership             
          between Grove Management Ltd. (GML), see infra sec. II.A.2., and            
          petitioner.  Aldergrove's principal place of business was on                
          Anguilla (an island of the British West Indies).  Aldergrove did            
          not file a U.S. Partnership Return of Income for 1991.                      
          Petitioners did not report any income from Aldergrove for 1991.             
               Pursuant to the Aldergrove partnership agreement, effective            
          July 1, 1984, partnership interests and capital contributions               
          were as follows:                                                            








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