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Addition to tax
Year Deficiency Sec. 6651
1989 $67,419 $17,586
1990 16,501 7,409
1991 16,765 6,947
1992 14,961 None
Petitioners formed Cabana Boy Productions, Inc. (Cabana
Boy), a subchapter C corporation. Cabana Boy tried
unsuccessfully to produce a movie. Petitioners contend that they
advanced to or paid on behalf of Cabana Boy $2,111,701.20 (the
advances or claimed advances).1
Following concessions, the issues for decision are:
1. Whether petitioners’ advances to Cabana Boy were loans,
as petitioners contend, or equity, as respondent contends. We
hold that they were equity and therefore are not deductible as
bad debts under section 166.
2. Whether petitioners may disregard Cabana Boy’s C
corporation status and deduct the advances as if Cabana Boy had
been organized as an S corporation and used the advances to pay
ordinary and necessary expenses. We hold that they may not.
3. Whether petitioners’ advances to Cabana Boy were made
to produce or collect income or for the management, conservation,
or maintenance of property held to produce income and are thus
deductible under section 212. We hold that they are not.
1 Respondent contends that petitioners did not advance or
pay that amount to or on behalf of Cabana Boy. Based on our
resolution of the issues in dispute, we need not decide whether
the amount petitioners claim is correct.
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Last modified: May 25, 2011