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Neppach had no “financial equity” in the corporation at that
time.
Petitioner used personal retirement funds and commercial
loans to make the equipment purchases. In 1997, petitioner
purchased an airplane at a cost of $38,000 in order to lease it
to PFC. This plane subsequently was sold in 1998 for $48,000, at
a gain of $17,600. In 1998, petitioner purchased two airplanes
and two airplane engines for lease to PFC. The cost of the
airplanes totaled $279,000, and the cost of the engines totaled
$60,000. Written leases were executed between petitioner and PFC
under which PFC was responsible for operating and maintenance
expenses, including fuel, repairs, insurance, and taxes.
Payments required under the leases ranged from $1,000 per month
to $2,000 per month per aircraft. PFC made actual lease payments
to petitioner of $7,000 in 1997, $9,500 in 1998, and $34,940 in
1999. These payments were significantly less than what was
required under the leases; for example, the leases required
payments totaling $40,100 in 1998. The equipment leased to PFC
was used exclusively by PFC. In addition to the aircraft leased
to PFC by petitioner and the five aircraft acquired from Stensin
Aviation, PFC leased five more aircraft from other parties.
On PFC’s Federal income tax returns for the years in issue,
the following income was reported and deductions claimed:
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