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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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Last modified: May 25, 2011