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The Service's revenue agent auditing MSSTA's 1989 return
preliminarily proposed, inter alia, that MSSTA realized $1.6
million on that sale and that MSSTA was liable for certain
penalties.
Attached to petitioners' 1991 return, which was filed on
August 4, 1992, was a statement, entitled "DISCLOSURE STATEMENT
OF TRANSACTION BETWEEN THOMAS H. AND LYNN D. SCOTT ("TAXPAYERS")
AND AMERICAN SECURITIES TRANSFER, INC. ("AST")", which stated in
pertinent part:
On June 27, 1991, the taxpayers' 12,300 shares of
common stock of AST were redeemed by the corporation,
AST. * * *
* * * * * * *
The 12,300 shares of AST stock sold have a cost basis
of $749,760. This basis represents the value assigned
to AST shares as determined by the Internal Revenue
Service in their examination of Mountain States Stock
Transfer Agents, Inc. (MSSTA) * * * for tax year 1989.
Around January or February 1992, petitioners retained J.
William Callison (Mr. Callison) to represent MSSTA and themselves
with respect to the Service's examination of the MSSTA trans-
action. Mr. Callison participated in settlement negotiations
with Service representatives regarding its examination of the
MSSTA transaction. On December 23, 1994, Form 906-C, Closing
Agreement on Final Determination Covering Specific Matters
(closing agreement), was entered into by the Service, Mr. Carter,
Mr. Scott, Ms. Scott, MSSTA, and AST. The closing agreement,
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