Bill L. and Patricia M. Spencer - Page 21

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               Attached to SPC-FL's 1990 Form 1120S was Form 859419 (Asset            
          Acquisition Statement Under Section 1060).  That Form 8594                  
          reports a sale of Class III assets20 by SSI to SPC-FL in exchange           
          for consideration of $1,150,000 on August 8, 1990.  Mr. Spencer             
          signed and reviewed SPC-FL's 1990 Federal income tax return.                

               Upon acquisition of the assets from the SPC-SC shareholders            
          and the SPC-FL shareholders, SPC-SC and SPC-FL, respectively,               
          claimed amortization deductions for the intangible contract                 
          rights based on 100 percent of their purchase price.  No amounts            
          were allocated to goodwill or other nonamortizable assets.                  
          Initially, respondent disallowed the claimed amortization                   
          deductions in their entirety.  Respondent's adjustment                      
          transformed the ordinary losses reported by SPC-SC and SPC-FL               

          19   Form 8594 is used to report information concerning the                 
          amount of consideration transferred in an "applicable asset                 
          acquisition" and its allocation among the assets transferred.               
          Sec. 1.1060-1T(h), Temporary Income Tax Regs., 53 Fed. Reg. 27042           
          (July 18, 1988).  The term "applicable asset acquisition" is                
          defined to mean any transfer (whether directly or indirectly) (1)           
          of assets which constitute a trade or business, and (2) with                
          respect to which the transferee's basis in such assets is                   
          determined wholly by reference to the consideration paid for such           
          assets.  Sec. 1060(c).                                                      
          20   "Class III assets are all assets (other than Class I, II,              
          and IV assets), both tangible and intangible * * * including                
          furniture and fixtures, land, buildings, equipment, accounts                
          receivable, and covenants not to compete."  Sec. 1.1060-                    
          1T(d)(2)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 27040                
          (July 18, 1988).                                                            

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