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In 1987, petitioner organized two S corporations: Living
Care Alternatives of Kirkersville, Inc. (LCAK), and Living Care
Alternatives of Utica, Inc. (LCAU). Petitioner transferred
ownership of the Kirkersville Nursing Home to LCAK and ownership
of the Utica Nursing Home to LCAU. After the transfers, he
remained responsible for repaying the funds that he had borrowed
to acquire the nursing homes. LCAK and LCAU never paid dividends
or made other distributions to petitioner as a shareholder. LCAK
and LCAU had no accumulated earnings and profits in 1993 and
1994.
Petitioner, as president of the S corporations, signed
promissory notes in which he agreed to pay himself and his former
wife $576,130.42 on April 1, 1987, and $700,000 on October 8,
1987.
On October 8, 1987, petitioner and his former wife borrowed
$500,000 from County Savings Bank. Petitioner paid $450,000 to
Braddock to repay her for financing the Utica Nursing Home
purchase. He used the rest to renovate the Utica Nursing Home.
2. Management
Petitioner bought the nursing homes so that he could earn
income from operating them and to provide a job for his then-
spouse. Petitioner planned to earn a fee for managing the
nursing homes and for his wife to earn a salary for serving as
the administrator of the nursing homes. Petitioner hoped to sell
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