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Petitioners and their son, Gregory Dunnegan, owned all of
the stock of Auto Plaza East, Inc. (Auto Plaza), which was
incorporated in April 1991. Petitioners were the majority
shareholders in Auto Plaza. Mr. Dunnegan was the president and
Mrs. Dunnegan was the secretary of Auto Plaza. The primary
business activity of Auto Plaza was the purchase and resale of
used cars.
Beginning in 1991, petitioners transferred funds to Auto
Plaza to cover operating expenses and to purchase vehicle
inventory. The funds were transferred to Auto Plaza in
increments and on an “as needed” basis, depending on the vehicles
purchased and the vehicles still in inventory. The funds
received by Auto Plaza from petitioners were recorded as “loans
from shareholders” in the bookkeeping records.
There were no notes reflecting the transfers from
petitioners to Auto Plaza. No collateral was provided by Auto
Plaza to petitioners with respect to the transfers. There was no
fixed repayment schedule between petitioners and Auto Plaza with
respect to the transfers. Petitioners received payments from
Auto Plaza only when funds were available, but they advanced more
than was repaid. No record of repayments was maintained.
Auto Plaza attempted to obtain financing from several banks
for its inventory but was not able to obtain traditional bank
financing without a personal guaranty from petitioners. Auto
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