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sought and received assurance that the Sta-Home tax-exempt
entities’ liabilities far exceeded the value of their assets and
that the value of the intangibles would not give the entities a
positive fair market value.
On July 11, 1995, the Sta-Home tax-exempt entities’ boards
of directors authorized the conversion of those entities into S
corporations. The S status was chosen so that the shareholders
could deduct the new entities’ future losses. On August 22,
1995, in anticipation of a transfer of the Sta-Home tax-exempt
entities’ assets, Kirkland’s firm, with petitioners’ approval,
formed the Sta-Home for-profit entities under Mississippi law.
Each of those corporations subsequently elected to be taxed as an
S corporation for Federal income tax purposes. Since their
formation, the only shareholders of each of the Sta-Home for-
profit entities have been Joyce Caracci (17.5 percent), Victor
Caracci (17.5 percent), Michael Caracci (30 percent), Christina
McQuillen (17.5 percent) and Vincent Caracci (17.5 percent). The
only directors and officers have been members of the Caracci
family.
On August 28, 1995, Hart’s accounting firm tendered an
appraisal stating that the value of the Sta-Home tax-exempt
entities’ assets was less than their liabilities. Kirkland had
assumed that this would be the case. On September 1, 1995,
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