Gerald L. and Erma L. Dunnegan - Page 4

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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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