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A. Discharge of Indebtedness Income
Stipulated evidence--specifically, Bonnevista’s 1991 Federal
income tax return and Castle Tower’s 1990 Federal income tax
return--shows that as of December 31, 1991, petitioner owed
Bonnevista $2,244,164, and that as of December 31, 1990, he owed
Castle Towers $633,329. Petitioners have stipulated that
Bonnevista and Castle Towers filed no subsequent Federal income
tax returns. These corporations failed, however, to provide
respondent the notification that would have been required if they
had ceased to exist.10
The stipulated evidence shows that in March 1993 when he
submitted his financial statement to the IRS, petitioner
represented under penalties of perjury–-and does not now
dispute--that he no longer owed these liabilities. Petitioner
does not argue, and has adduced no evidence to show, that he
directly repaid these loans.
10 If an S corporation ceases to exist, it thereby
terminates its election under sec. 1362(a) to be taxed as an S
corporation and is required to attach to its return for the
taxable year in which the termination occurs a notification that
a termination has occurred and the date of termination. See sec.
1.1362-2(b)(1), Income Tax Regs. In addition, if the corporation
has ceased to exist, box F(2) of Form 1120S, indicating a final
return, must be checked. See Instructions for Form 1120S; see
also sec. 1.6037-1(a)(5), Income Tax Regs. (the return of an S
corporation shall include, inter alia, information as is required
by the instructions issued with respect to the form). The last
returns presented by Bonnevista and Castle Towers, as stipulated
into evidence, include no attachments notifying the Commissioner
that a termination has occurred, nor is box F(2), indicating a
final return, checked on either return.
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