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Hattie, claimed Schedule C losses of $540,567, $173,480, and
$248,653 for 1992, 1993, and 1994, respectively; and William and
his wife, Sylvia, claimed Schedule C losses of $195,541, $66,991,
and $90,170 for 1992, 1993, and 1994, respectively.
Cola, Inc. filed corporate income tax returns (Forms 1120) for
1992, 1993, and 1994, reporting no taxable income or expenses
(other than a franchise tax fee paid to the State of California).
Respondent disallowed the Schedule C losses petitioners
claimed on their respective returns on the grounds: (1) The losses
belonged to Cola, Inc., and not petitioners as individuals; and (2)
petitioners failed to demonstrate that the losses were actually
incurred.
OPINION
Issue 1. Characterization of Cola, Inc.
The fundamental issue involved is whether Cola, Inc.
constituted a separate corporate taxable entity during 1992, 1993,
and 1994. Respondent contends that it did, and accordingly, Cola,
Inc.'s losses were improperly deducted on petitioners' individual
returns. On the other hand, petitioners maintain that shortly
after Cola, Inc.'s formation, Richard learned that Raul would be
unable to contribute capital to the corporation as anticipated and
consequently, Richard was forced to abandon the business' corporate
form and operated it as a sole proprietorship.
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