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Understatement of Equipment Rental Income
Findings of Fact
On March 15, 1990, Bone and Guerrero formed a new S
corporation, Olympic, to operate a business project in Washington
State. In 1992, Guerrero owned 51 percent of Olympic’s common
stock and Bone owned the remaining 49 percent. Bone and Guerrero
each contributed $500 to Olympic, arranged for Olympic to lease
concrete pumping trucks, and permitted Olympic to borrow capital
from petitioner. During the period under consideration, Olympic
made repayments to petitioner. During its existence, Olympic
leased trucks and concrete pumping equipment from petitioner for
use in Olympic’s business. Olympic discontinued business in
1992.
Olympic, pursuant to the lease with petitioner, was
obligated to pay an $11,681.41 monthly rental for use of the
equipment. Olympic paid petitioner $190,415.89 during the fiscal
year ending March 31, 1992. Of the $190,415.89, petitioner
reported $64,839 as rental proceeds on its 1992 tax return. Of
the remaining $125,576 in payments, petitioner contends that they
should be treated as nontaxable payments on a loan. Respondent,
however, has allowed only one-half of the $125,576, or $62,788,
to be treated as a loan repayment from Olympic to petitioner, and
respondent treated the other one-half as additional lease
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Last modified: May 25, 2011