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PPD&G had total assets on its books and records of approximately
$1.8 million and total liabilities of approximately $3.3 million,
including $1.3 million in notes payable to BEI. In 1988, two
other BEI subsidiaries, Reelcraft and Ainsley Communications,
ceased operations. At the time of cessation of business,
Reelcraft's total assets and total liabilities were approximately
$1 million and $1.7 million, respectively. The liabilities
included approximately $1.4 million owed to BEI. Petitioner did
not make any efforts to collect money from these companies for
repayment of the advances.
For the 1988 taxable year, petitioners claimed a business
bad debt deduction of $5,360,636, consisting of $1,156,684 in
advances to TELCOR and $4,203,952 in advances to BEI. The
claimed deduction was the excess of the respective total
liabilities of BEI and TELCOR, including the advances from
petitioner, over the total assets of the entities. Neither BEI
nor TELCOR recognized cancellation of indebtedness income in the
amount of the bad debt deduction or reduced the amount of
liabilities owed to petitioner on their books and records.
The bad debt deduction resulted in a net operating loss
(NOL) in 1988 of $3,057,871. On May 3, 1989, petitioners filed a
Form 1045, Application for Tentative Refund, seeking refunds of
$384,753 and $162,519 for Federal income tax paid in 1985 and
1986, respectively. The claimed refunds are based on the
carryback of the 1988 NOL. In a statement attached to the refund
application, petitioners requested expedited processing of the
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