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On January 27, 1992, these cases were consolidated. These
consolidated cases were submitted without a trial pursuant to
Rule 122.
At the time the petitions were filed in these cases,
Guaranteed and ABC (hereinafter sometimes collectively referred
to as the Entities or individually referred to as an Entity) were
corporations incorporated in the State of Texas with their
principal offices located in Wichita, Kansas. During the taxable
periods in controversy, Guaranteed and ABC were accrual basis
taxpayers.
For the fiscal year ending May 31, 1987, ABC timely filed
its Federal corporate income tax return. ABC timely filed a
valid subchapter S election, and the election was granted
effective June 1, 1987. Guaranteed timely filed its Federal
corporate income tax return for an S corporation for the calendar
year ending 1987, and ABC timely filed its Federal corporate
income tax return for an S corporation for the short taxable
period ending December 31, 1987. Guaranteed and ABC timely filed
their Federal corporate income tax returns for S corporations for
the calendar year 1988.
Guaranteed and ABC operated commercial enterprises which
rented consumer durables (appliances, furniture, televisions,
stereos, and video cassette recorders) under rent-to-own leases
to individuals. Both Entities have been in the rent-to-own
business for a number of years. During the tax periods in
controversy, Guaranteed and ABC estimated that the total gross
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