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from Adena to Fox Trot as accounts payable to (i.e., loans from)
petitioners.
On December 31, 1994, Mr. Yates executed a note (1994 note),
promising to pay Adena $1,241,409, plus 5 percent interest, due
December 31, 1995. The 1994 note evidenced the amount Mr. Yates
owed Adena relating to the 1994 transfers to Fox Trot. On
October 15, 1995, Mrs. Yates repaid $855,000 to Adena, and on
December 31, 1995, Mr. Yates executed a new note to Adena for
$435,214.28 (i.e., the balance owing on the 1994 note).
Petitioners filed joint income tax returns for 1994, 1995,
and 1996. On their 1994, 1995, and 1996 income tax returns
petitioners claimed losses passed through from Fox Trot. In the
notices of deficiency, respondent determined that petitioners
lacked sufficient basis in Fox Trot to pass through its losses
during the years in issue, disallowing losses of $837,556,
$854,372, and $728,243 in 1994, 1995, and 1996, respectively, and
a net operating loss deduction of $522,439 in 1995.
OPINION
Respondent contends that the transfers from Adena to Fox
Trot were intercompany loans that did not affect petitioners’
basis in Fox Trot. Petitioners contend: (1) The transfers from
Adena to Fox Trot before September 1, 1994, were, in substance,
transfers from Mr. Yates to Fox Trot that increased Mr. Yates’
stock basis in Fox Trot; and (2) the transfers after September 1,
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