- 12 -
The S/B note was revised on or about February 1, 1990, and
the repayment period was extended from 10 years to 15 years.
SPC-SC then commenced payments to SSI during April 1990, but
ceased payments during August 1991, when it began experiencing
cash-flow problems. No payments were made for the next 5 months,
from September 1991 through January 1992. The S/B note was again
revised on or about December 1, 1992, when the interest rate was
reduced from 8 percent to 6.5 percent.
Information Reported by SPC-SC and Mr. Spencer
SPC-SC did not report interest income on its Federal income
tax returns for taxable years 1991 and 1992. SPC-SC, however,
deducted the interest it paid to both SCNB and SSI, and interest
expense was among the operating expenses that SPC-SC used in
arriving at its net operating loss that ultimately passed through
to the SPC-SC shareholders.11 On their Federal income tax
returns, the Spencers claimed the following amounts as Mr.
Spencer's share of losses from SPC-SC:
Year Amount of Loss Claimed
1990 $17,741
1991 15,031
1992 37,673
SPC-SC issued no Forms 1099 to report interest paid to its
shareholders. On their individual Federal income tax returns,
11 Mr. Spencer signed SPC-SC's Federal income tax returns for
all of the years in issue in the instant case.
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