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in the amounts of $31,875, $131,425, and $114,675, respectively.
For the same years, American debited interest payments due from
petitioner under the Grojean note and the Grojean credit note
from petitioner’s checking account for identical amounts, with
the net effect to petitioner for all years being a wash.
As a condition of receiving their loans, Schanno, Schanno
Acquisition, and petitioner were required to give American annual
financial statements of Schanno that were audited and certified
by an independent accounting firm. In the certified financial
statements that were prepared by the accounting firm for 1989,
1990, and 1991, Schanno reported that petitioner’s participation
interest was a $1.2-million guaranty of the corporation's $8.4
million loan and $2.6 million revolving credit loan.
On his 1989, 1990, and 1991 Federal income tax returns,
petitioner claimed passthrough ordinary losses from Schanno in
the amounts of $1,186,375, $9,389, and $28,273, respectively.
Petitioners also claimed petitioner’s share of a net operating
loss carryforward from Schanno from 1989 to 1990 in the amount of
$591,245. In applying the basis limitation under section
1366(d), he included in his basis $1.2 million representing his
participation interests in the Schanno note and the credit note.
Respondent disallowed the inclusion of that amount in
petitioner’s basis computation and determined that petitioner did
not have sufficient basis in his Schanno stock to allow for the
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