Compact Equipment Company - Page 12

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          construction of the Carnelian Bay residence.  Atkinson alleviated           
          Ameye’s concerns by stating that the issue had already been                 
          brought to his attention and that he intended to pay back the               
          $69,000 to petitioner.  Atkinson failed to tell Ameye that                  
          petitioner incurred and paid many other expenses related to the             
          construction of the Carnelian Bay residence.                                
               A few days later, Atkinson and Dunkin again addressed the              
          $69,000 deduction.  Atkinson instructed Dunkin not to deduct the            
          $69,000 payment on petitioner’s corporate tax return.  With                 
          Atkinson’s approval, Dunkin also established a $69,000 accounts             
          receivable from Atkinson on petitioner’s books.  Atkinson was to            
          pay back the loan out of his next bonus.  Atkinson failed to                
          inform Dunkin of the other expenditures incurred by petitioner in           
          the construction of the Carnelian Bay residence.  On March 23,              
          1986, Atkinson paid petitioner $69,051 with regard to the loan.             
          On May 28, 1986, Neoax Corp. purchased Atkinson’s 100-percent               
          interest in petitioner for $3.5 million plus a contingent amount            
          based on petitioner’s earnings over the subsequent 3 years.                 
          The Internal Revenue Service’s (IRS) Investigation of                       
          Petitioners’ Corporate and Individual Tax Returns                           
               On May 11, 1988, an IRS special agent and an IRS revenue               
          agent interviewed Atkinson regarding allegations that he had                
          underreported his income on his 1985 and 1986 individual tax                
          returns and that petitioner had improperly deducted the                     
          construction expenses on its corporate tax returns for the                  

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