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Year Liabilities Equity
1987 $887,937 ($204,556)
1988 954,758 (315,821)
H. Tax Returns
On its 1986 return, Cabana Boy reported that loans from
shareholders were $391,045 at the beginning of 1986 and $137,102
at the end of 1986. Hyman prepared Cabana Boy's Forms 1120, U.S.
Corporation Income Tax Returns, for its taxable years ending
November 30, 1987 through 1990. On June 22, 1995, Mrs. Rosenberg
signed Cabana Boy's corporate tax returns as president.
Petitioners did not treat their advances to Cabana Boy as loans
or claim bad debt deductions on their individual income tax
returns.
I. Dissolution of Cabana Boy
Cabana Boy was dissolved on March 24, 1993. Petitioners
never demanded repayment of any money spent on the Cabana Boy
project.
OPINION
Petitioners offer several alternative theories to support
the deduction of their advances to Cabana Boy: (A) The advances
were debt, not equity; (B) their advances to Cabana Boy were
business expenses of Cabana Boy which petitioners may deduct as
if Cabana Boy were an S corporation, or they were Cabana Boy’s
alter ego; (C) petitioners may deduct the advances under section
212 as expenses to produce income; and (D) petitioners may deduct
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