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might be awarded in the lawsuit filed in 1990 (presumably for the
benefit of its creditors). The WIS chapter 11 proceedings
concluded in 1992. Petitioner’s attempt to revive the insurance
investigation business through SPS was short lived. Lewis and
Tate left the venture in 1992 and 1993, respectively, and SPS
ceased business in 1994.
For all relevant years, WIS and SPS qualified as S
corporations within the meaning of section 1361(a)(1). It
appears that WIS had no accumulated earnings and profits from
prior years in which it may have been a C corporation. Each
corporation maintained its books and records and filed its
returns using the cash method of accounting. In the absence of
any evidence to the contrary, we assume that each corporation
computed its income on the basis of a calendar year. See sec.
1378.
On their joint Federal income tax return for 1991,
petitioners reported income attributable to WIS in the amount of
$1,541. They also claimed a deduction for “other losses” in the
amount of $136,748, which petitioners claim is attributable to
WIS. The computation of the loss was disclosed in an attachment
to the return. The attachment purports to be a balance sheet for
WIS as of December 31, 1991, prepared for purposes of the chapter
11 reorganization. The balance sheet lists corporate assets,
“pre-petition liabilities” and “post-petition liabilities”, and
reflects a deficit in shareholder’s equity of $136,748.
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