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For FYE May 31, 1994, petitioner reduced its income by
$6,085,248.18 This amount consisted of the ending balance of
G�nther’s intercompany account as of May 31, 1994, that had not
yet been written off for Federal income tax purposes ($2,375,788)
and the amount of G�nther’s guaranteed bank loans petitioner
assumed ($3,709,460).
X. Notice of Deficiency
In the notice of deficiency, respondent disallowed
petitioner’s deductions for bad debts and worthless stock
attributable to G�nther that were claimed for FYE May 31, 1992
and 1993, increased petitioner’s income for FYE May 31, 1994, and
reduced petitioner’s net operating losses for FYE 1992, 1993, and
1994, accordingly. Respondent recharacterized the disallowed
deductions as long-term capital losses and recomputed the net
operating loss carrybacks allowable for FYE 1989, 1990, 1991, and
1992. Respondent also determined that other adjustments were
required, which have since been resolved by agreement or are
computational.
18In the notice of deficiency, respondent proposed an
adjustment increasing petitioner’s income by $6,085,248. For
briefing and argument purposes, however, the parties have treated
the disputed adjustment as the disallowance of a bad debt
deduction.
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