Philip A. Sellers - Page 8




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          Corporate Income Tax Return, Gandy’s reported net losses of                 
          $1,205,578 and $1,412,516.  Near the end of 1993, Gandy’s had               
          retained earnings deficits of approximately $4 to $5 million.               
               On December 23, 1993, Gandy’s repaid $5,000 of petitioner’s            
          advances.9  Otherwise, Gandy’s repaid neither principal nor                 
          interest on any of the advances made by petitioner from 1990                
          through 1993.                                                               
          Default on the Gandy’s Bonds and Foreclosure                                
               Gandy’s never made any interest or principal payments on               
          the Gandy’s bonds.  On February 1, 1994, the Gandy’s bonds                  
          trustee declared Gandy’s in default of its bond obligations and             
          foreclosed on Gandy’s assets.  Philip purchased Gandy’s assets              
          from the foreclosure, and Gandy’s has continued to operate under            
          the name Macon Manufacturing.  In 1994 and 1995, petitioner                 
          advanced additional, undisclosed sums to Macon Manufacturing.               
          Petitioners’ Return Positions and Respondent’s Determinations               
               On their 1993 joint Federal income tax return, petitioners             
          deducted $355,483 as a bad debt deduction and reported a net                
          operating loss of $169,331.10  On their 1995 joint Federal income           
          tax return, petitioners claimed a net operating loss of $177,794,           

               9 The record does not reveal specifically to which advance             
          this repayment related.  Petitioner testified that the repayment            
          was allocated “to principal.”                                               
               10 This amount represents the total amount of money that               
          petitioner advanced to Gandy’s in 1990 and 1993, less the $5,000            
          that Gandy’s repaid in Dec. 1993.                                           





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