Advanced Delivery and Chemical Systems Nevada, Inc. - Page 14

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          October 7, 1996, termination of petitioner’s subchapter S                   
          status.4                                                                    
               On or about June 30, 1997, there was filed on behalf of                
          petitioner a subchapter C Federal corporate income tax return for           
          petitioner’s 1996 short taxable year beginning October 8, 1996,             
          and ending December 31, 1996.  On this subchapter C corporate tax           
          return, petitioner reported the approximate $1.9 million in                 
          current year retained earnings, and petitioner reflected the                
          approximate $9.7 million in retained earnings accumulated in                
          prior years, essentially all of which earnings were merely                  
          allocated to petitioner from and through ADCS-Limited, Holdings             
          LLC, and Operating LLC (because ADCS-Limited, Holdings LLC, and             
          Operating LLC were treated as nontaxable partnerships).                     
          Essentially all the funds reported as retained earnings by                  
          petitioner actually were held and retained by ADCS-Limited, and             
          were never actually distributed to petitioner.                              
               On or about June 15, 1998, there was filed on behalf of                
          petitioner a subchapter C, Federal corporate income tax return              
          for petitioner’s 1997 short taxable year beginning January 1,               
          1997, and ending October 10, 1997.  On this subchapter C                    



               4  Even though petitioner was not incorporated until                   
          June 13, 1996, petitioner’s original and amended subchapter S               
          corporate Federal income tax returns for its first short taxable            
          period apparently were filed for the short taxable period                   
          beginning as of Apr. 1, 1996.                                               





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