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On July 22, 1993, a secondary public offering was held with
stock in petitioner selling for $17.50 per share. Through this
secondary offering, JC Investors sold off all of its stock in
petitioner.
During the years in issue, petitioner operated as an accrual
basis taxpayer with a tax year ending January 31.
Tax Returns and Audit
On its corporate Federal income tax returns for each of its
taxable years 1990 through 1993, petitioner claimed a current
business expense deduction to amortize a ratable portion of the
$5 million paid to Cruze in 1990 under the 3-year covenant not to
compete, as follows:
Tax Year Ending Amortization Claimed
Jan. 31, 1990 $ 694,444
Jan. 31, 1991 1,666,667
Jan. 31, 1992 1,666,666
Jan. 31, 1993 972,223
Total $5,000,000
On its 1990 corporate Federal income tax return, petitioner
claimed an ordinary business expense deduction for the total
$1.25 million paid to Panzica, Battistella, and Navarra under the
bonus and noncompetition agreements.
On its 1992 corporate Federal income tax return, petitioner
claimed a current business deduction of $1,342,347 for financing
charges allegedly incurred in connection with the LBO.
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