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account and treated as dividends from Adena, reducing his basis
in Adena’s stock. Mr. Adams knew about and acquiesced to
petitioners’ practice of paying personal expenses with funds from
the Adena account.
Mr. Yates personally guaranteed a large amount of debt
relating to the mining companies (mining debt) and was concerned
about the likelihood of personal injury lawsuits relating to
employees of such companies. In an attempt to protect some of
his assets from these risks, and to provide a mechanism to
accumulate assets for retirement, on December 16, 1992, Mr. Yates
incorporated Fox Trot as an S corporation. Through Fox Trot
petitioners purchased, improved, and operated a Kentucky farm.
Mr. Yates kept Fox Trot’s assets and liabilities separate from
those of the mining companies.
From January 1, 1993, until September 1, 1994, Mr. Yates was
the sole shareholder of Fox Trot. On September 1, 1994, to
further separate Fox Trot’s assets from the mining companies’
risk, Mr. Yates gave all of Fox Trot’s stock to Mrs. Yates, who
was the sole shareholder of Fox Trot from September 1, 1994,
through 1996.
During the years in issue, Fox Trot experienced substantial
losses. Mr. Yates used funds from Adena to finance Fox Trot.
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