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Background
Petitioners, husband and wife, resided in Fairbanks, Alaska,
at the time they filed their petition in this case.
At all relevant times, Robert H. Bettisworth (petitioner) was
a 33.3-percent shareholder in Narwhal, Inc. (Narwhal), an S
corporation. At the end of 1992, petitioner’s basis in his Narwhal
stock was zero; in 1993, his basis increased to $68,125 as a result
of a loan he made to the corporation.
Narwhal was in the business of developing real estate. In
1993, Narwhal was forced to surrender most of its real estate
holdings through foreclosure. As a result, Narwhal realized COD
income of $3,321,471. Because Narwhal was insolvent, the COD
income was treated as nontaxable pursuant to section 108. For
1993, Narwhal had ordinary losses of $2,586,238.
Narwhal issued petitioner a Schedule K-1 for 1993, reflecting
his distributive share of Narwhal’s COD income ($1,107,155) and
ordinary losses ($862,078). Petitioner increased the basis in his
Narwhal stock by the amount of his distributive share of Narwhal’s
COD income, and amended returns were filed in order to take
advantage of previously disallowed net operating losses (NOL’s).2
The NOL’s were first carried back 3 years and then carried
2 Before 1993, petitioners had $275,323 in suspended
losses.
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Last modified: May 25, 2011