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arrangement. There is no evidence in the record that any loan
terms were established. There is no payment schedule, no
interest rate, nor any recourse for late-payments. PPP did not
formally declare dividends in either 1995 or 1996.
The amount and nature of every distribution was determined
solely by petitioner. In 1995 and 1996 petitioner made a variety
of distributions including, among others, salary and expenses.
Respondent audited PPP’s returns for 1995 and 1996 and determined
that it made the following payments to or on behalf of petitioner
that were distributions with respect to her stock:
1995 1996
Taxes and licenses for Mercedes Benz $1,467 0
Auto expenses for Mercedes Benz 2,031 $4,596
Auto insurance for Mercedes Benz 2,966 0
Payments for Mercedes Benz 27,427 8,465
Interest expense for Mercedes Benz 1,747 3,882
Health club dues 0 1,263
Home security 630 0
Total Payments 36,268 18,206
PPP’s records indicate it paid the costs for three cars.
One of the cars, a 1994 Land Cruiser, is not at issue in this
case. Each of the other two cars was a Mercedes Benz. In 1995,
the first Mercedes was traded in for the second, a later model.
During the audit, petitioners could not establish a business
purpose or a business use for either Mercedes.
The parties agree that the following accurately represents
the relevant portions of PPP’s balance sheet for 1995 and 1996:
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Last modified: May 25, 2011