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Mr. Lechner filed an individual income tax return for 1993,
and Stainless filed a corporation income tax return for the
fiscal year ended September 30, 1993. Attached to each of those
returns was a statement regarding the organization of Stainless
in a section 351 exchange. This statement recited that all
assets of the sole proprietorship, including “cash accounts and
other receivables”, were transferred to Stainless in exchange for
its common stock, but that the “only liability assumed was
withheld payroll taxes”.
The sole proprietorship and Stainless during the taxable
years in issue used the cash method of accounting for income tax
purposes without objection from respondent.
Mr. Lechner incurred $239,594.68 of debt to Stainless by
depositing in his personal bank account gross receipts of
Stainless attributable to payments, after May 31, 1993, for jobs
in progress of the sole proprietorship. On June 30, 1993,
Stainless accounted for the deposit by making a journal entry
(designated “Receivable from Officer”) in its accounting records
showing that Mr. Lechner owed Stainless the amount deposited in
his personal account. No promissory notes were ever made
representing this debt, and no interest was charged on this debt.
After June 1, 1993, Mr. Lechner also made payments with funds
from his personal bank account of expenses related to the jobs in
progress, and those payments reduced his outstanding debt to
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