Veronica Chu - Page 4

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          petitioner’s percent ownership of Topaz’s stock.                            
          Topaz’s Returns                                                             
               Topaz reported a $2,509 loss on its Form 1120S, U.S. Income            
          Tax Return for an S Corporation, for the year 1996.  On Schedule            
          D, Capital Gains and Losses, Topaz reported a $709,297 gain from            
          the sale of Aptus stock.                                                    
               Topaz reported a $284,434 loss on its Form 1120S for the               
          year 1997.4  The portion of the return labeled Tax and Payments             
          is blank.  In the Income (Loss) section of Schedule K,                      
          Shareholders’ Shares of Income, Credits, Deductions, etc., Topaz            
          claimed an $894,722 loss on the Other Income (loss) line.  Also             
          written on the line is “See Sch.”  The attached document labeled            
          Form 1120S, Page 3, Schedule K, Line 6-Other Income (Loss), shows           
          an $894,722 long-term business loss.  Also on its Schedule K,               
          Topaz claimed a $1,180,895 loss on the Income (loss) line in the            
          Other section.                                                              
               On the attached Schedule D, Capital Gains and Losses and               
          Built-In Gains, an $894,722 long-term capital loss is listed on             
          the sale of Aptus Stock.  Reported on the schedule is an $894,722           
          basis, and the column labeled Sales price is blank.                         
               Topaz did not file a Form 1120S for the taxable years 1998,            
          1999, and 2000.                                                             

               4  Respondent stated at trial that the return was timely               
          filed.  We note that the return was signed by petitioner on May             
          11, 2004.                                                                   





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