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failing to report taxable income of the sole proprietorship for
prior years, the parties took pains to agree and to assure the
Court that there was nothing improper in Mr. Lechner’s taking the
receipts and paying the associated expenses. We accept their
assurances and impute no wrongdoing to Mr. Lechner, who appears
merely to have been following the advice of his accountant, Mr.
Noble, at all times relevant to these proceedings.
What Mr. Lechner and Stainless did to “make it right”,
apparently on the assumption that the only proper way to handle
the incorporation was for Stainless to take over the receivables
and payables arising from the sole proprietorship’s work in
progress, was to set up a corporate receivable from Mr. Lechner
in the amount of the receipts and to reduce that receivable when
Mr. Lechner paid the associated expenses. The amount of the
receivable, reflected in the progress payments taken by Mr.
Lechner, and its reduction by the associated expenses that he
paid, were reported by Stainless as corporate income and
expense.4
4 Inasmuch as both the sole proprietorship and the
corporation used the cash method of accounting, this treatment
appears to have been proper and consistent with the way the
incorporation of a cash basis business can be handled under secs.
351, 357(c), and 358(d). See Hempt Bros., Inc. v. United States,
490 F.2d 1172 (3d Cir. 1974); Rev. Rul. 80-198, 1980-2 C.B. 113;
see also Focht v. Commissioner, 68 T.C. 223 (1977); Rev. Rul. 80-
199, 1980-2 C.B. 122. Notwithstanding that the sole
proprietorship earned the receipts and incurred the liabilities
(continued...)
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