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nor was any repayment schedule set. From time to time, the three
corporations made cash repayments, or book entry credit was made
to the advances for services rendered to petitioner. While the
corporations were viable, they repaid $414,220 to petitioner.
Petitioner accrued interest only sporadically on the advances to
two of the corporations and failed to accrue any interest against
the advances to the third, contrary to the advice of Mr. Cerand’s
tax adviser. The interest that petitioner did accrue on its
books was rolled over annually into a note receivable and
reported as income by petitioner. Because that income was never
actually received by petitioner, respondent has allowed a
deduction against ordinary income for that amount.
The three corporations used funds received from petitioner
to pay operating expenses. No capital assets were purchased by
the corporations. Instead, all assets were leased, primarily
from Mr. Cerand.
In 1989, the corporations experienced two costly and
devastating events, the loss of FWC’s lease for ASC’s operations
at Culpeper County Airport and the loss of CAI’s Government
contract comprising approximately 90 percent of its business.
These events caused the demise of CAI and ASC in 1990, with FWC
close behind in 1991.
Once the companies went out of business, there were no
assets to seize as repayment, except for a key man life insurance
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Last modified: May 25, 2011