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Petitioner and Hammontree filed a partnership tax return for
Glenwood for the calendar year 1988. For the 1988 tax year,
Glenwood reported ordinary losses of $517 and claimed $5,000 in
section 179 expenses. Glenwood’s Schedule K for 1988 reflected
that petitioner and Hammontree each owned 50 percent of the
partnership. Petitioners reported flowthrough activity from
Glenwood for tax years 1988 through 1992 on their Forms 1040,
U.S. Individual Income Tax Return.
Effective February 28, 1989, Glenwood became incorporated as
Glenwood Wrecker Service, Inc., and the Glenwood partnership was
terminated. The partnership assets and liabilities were
exchanged for all of the issued stock in Glenwood.
Additionally, a short-year partnership tax return was filed for
the period ending February 28, 1989. The partnership reported
ordinary income of $788 for the short tax year ending February
28, 1989. Petitioner’s ending basis in Glenwood partnership and
his beginning basis in Glenwood corporation was $13,914.
On April 25, 1989, petitioner and Hammontree personally
guaranteed a bank loan to Glenwood in the amount of $43,080. The
loan was secured by Glenwood’s assets, which consisted of six tow
trucks and one office trailer. Petitioner and Hammontree agreed
that $29,788.59 should be removed from the corporation by
Hammontree and paid to petitioner in payment for Hammontree’s
one-half interest in the business. The following day, April 26,
1989, petitioner received a $29,788.59 corporate check, signed by
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