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On January 20, 1988, the partnership obtained a loan in the
amount of $403,000 from Great Midwestern Bank (Great Midwestern).
The loan was secured by a deed of trust on the Fresno property
and was individually and personally guaranteed by all of the
partners.
In 1991, to avoid the personal liability exposure inherent
in conducting business as a partnership, the partners agreed to
convert the partnership to an S corporation. The partners
incorporated Clovis A.S.K. Properties, Inc. (ASK Properties), an
Ohio corporation, on January 3, 1991. Since its incorporation,
ASK Properties has engaged in the business of renting out the
apartments on the Fresno property. Petitioners, together,
received 25 percent of the outstanding stock of ASK Properties
upon its incorporation. Petitioners acquired the remaining
75 percent of the outstanding stock in 1992. The Internal
Revenue Service informed petitioners in March 1991 that a request
by ASK Properties to be treated as an S corporation had been
approved.
The partners agreed that it would be in their best interests
to transfer all of the partnership assets and liabilities to ASK
Properties, including the Fresno property subject to the deed of
trust. Shortly after forming ASK Properties, the partners
attempted to transfer the Fresno property and their debt
obligation on the Great Midwestern loan to the corporation.
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Last modified: May 25, 2011