Clifford L. Brody and Barbara J. Declerk - Page 7

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               Notwithstanding the representations in the Confidential                
          Private Placement Memorandum, “key man insurance” was obtained at           
          some point.4  KOA was the beneficiary of the policy, and while              
          not required by KOA, petitioners paid the insurance premiums on             
          the key man insurance policy.                                               
               In August 2001, KOA merged with e-Redeem, Inc., a Delaware             
          corporation in which petitioner Brody served as President.  In              
          letters to shareholders of KOA dated May 31, 2001, petitioner               
          Brody proposed that said shareholders would receive an aggregate            
          of 49.568 percent of the fully diluted capital stock of the                 
          merged entity.                                                              
               Petitioner Brody, who has a background in accounting,                  
          prepared KOA’s Form 1120-A, U.S. Corporation Short-Form Income,             
          for the 1999 taxable year (1999 corporate return).  KOA claimed             
          deductions for repairs and maintenance of $13,186 and for rents             
          of $44,762.  KOA did not report any loans from shareholders.                
               Petitioner Brody also prepared petitioners’ Form 1040, U.S.            
          Individual Income Tax Return, for the 1999 taxable year (1999 tax           
          return).  Petitioners did not file a Form 4797, Sales of Business           
          Property, with their 1999 tax return.                                       





               4  The parties did not provide the Court with a copy of the            
          insurance policy.                                                           





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