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Plaza could not obtain loans from banks on the same terms as the
funds provided by petitioners.
In 1993, Mr. Dunnegan forgave, or permitted Auto Plaza to
write off, $700,000 of the accumulated transfers that were
recorded as shareholder loans, in an effort to improve the
corporation’s debt equity ratio and to make the corporation
viable. Auto Plaza discontinued its business activities in 1994.
Petitioners deducted the bad debt expense on Schedule C for
a “loans and collections” business. Petitioners filed two
separate returns for 1993 claiming $700,000 in bad debt expense
on the return filed on July 3, 1995, and $370,000 in bad debt
expense on the return filed on September 28, 1995. (The Court
requested that petitioners provide an explanation for the filing
of the two different tax returns in their brief, but no
explanation was provided.) Petitioners also claimed bad debt
expense of $246,175 in 1994.
Petitioners are in the business of selling fireworks, both
wholesale and retail. The retail stores are located in Dennings
and Moriarty, New Mexico; in Wyoming; and in Wichita and Kansas
City, Kansas.
Mr. Dunnegan worked 60 or more hours per week for Auto
Plaza, except during fireworks season when he spent half his time
performing activities related to the fireworks businesses. His
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