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in question, regarding construction of a new restaurant and bar
to be named Severo’s. Guaderrama had never constructed
commercial property before, but he studied the proposed
transaction and concluded that it would be a good investment.
Guaderrama and Benavidez subsequently entered into several
agreements. On July 26, 1991, Benavidez deeded the tract of land
in Dona Ana County to the Guaderramas. Guaderrama then lent
Benavidez $25,000 to pay off the outstanding amount under the
real estate contract between Benavidez and Saenz. On October 9,
1991, Guaderrama entered into a construction agreement with JVG
Construction Co. providing for the construction of Severo’s. JVG
Construction Co. is operated by Guaderrama’s nephew, and
Guaderrama financed the construction of Severo’s with his
savings. Benavidez designed the floor plan for Severo’s, while a
contractor designed the rest of the restaurant.
On December 4, 1991, the Guaderramas leased the land in Dona
Ana County to L&G Investments Ltd. (L&G). L&G, a New Mexico
corporation wholly owned by the Guaderramas, was incorporated on
December 13, 1991, and is structured as an S corporation for
Federal income tax purposes. L&G does not have bank accounts and
did not file a Form 1120-S, U.S. Income Tax Return for an S
Corporation, for the 1993 tax year.
On December 10, 1991, Benavidez sold his liquor license to
L&G for $10 and assigned the trade name “Severo’s” and its
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