Salvador A. and Kathleen M. Gaudiano - Page 5

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               On its Form 1120S for 1993, Four A reported the transfer of            
          the equipment as a sale and reported the amount realized on the             
          sale as $445,000 (the total purchase price under the agreement).            
          This resulted in a section 1231 loss of $275,006.  In 1996, Four            
          A filed an amended Form 1120S which reported the amount realized            
          on the sale as $145,430.  This increased the section 1231 loss to           
          $574,576.  In 1996, petitioners filed Forms 1040X seeking refunds           
          for 1993 based on their pro rata shares of the increased section            
          1231 loss from Four A.                                                      
          III.  Business Bad Debt Deduction                                           
               From 1988 to May 6, 1991, Four A sustained substantial                 
          losses, and Appolo advanced significant amounts of money to Four            
          A on a demand basis for the working capital needs of Four A (Four           
          A debt).  During 1993, G. Asher and L. Asher were shareholders of           
          Appolo, each owning 24 percent of its outstanding shares.  John             
          Asher, their father, was the majority shareholder of Appolo.                
               In March 1991, Price Waterhouse LLP (PW) audited Appolo's              
          1990 financial statements.  During the audit, PW questioned the             
          collectability of the Four A debt and suggested that Appolo                 
          establish a reserve against the Four A debt.  PW and S. Gaudiano,           
          acting in his capacity as the chief financial officer of Appolo,            
          reached an agreement whereby petitioners, acting in their                   
          capacity as Four A shareholders, would execute guaranties to                







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