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While the gaps in the documentary record admittedly inhibit
precise computation of all relevant figures, respondent’s stance
would appear to be at odds with the stipulated evidence.
Concerning Excellence, the parties do not dispute that
Mr. Gleason made an initial contribution of $50,000 in 1992.
Petitioners’ 1993 return reported no income or loss from
Excellence, but their 1994 and 1995 returns reported ordinary
income (business income and interest income) from Excellence of
$317,959 and $826,737, respectively. We have also just sustained
respondent’s position that an additional $264,371 should have
been reported by petitioners in 1995. These income amounts would
serve to increase basis. Hence, the record supports that
sufficient basis was available to permit the $360,000 distributed
during the entity’s FYE 1995 to qualify for tax-free treatment
under section 1368(b)(1). Remaining basis would then be reduced
by a corresponding amount under section 1367(a)(2)(A) and would
result in a decreased carryover basis upon the subsequent
exchange of Excellence shares for stock in Alofs and Target.
As regards Alofs, again the parties do not dispute a $50,000
initial contribution, and petitioners reported ordinary income
from Alofs of $401,192 on their 1994 return and, as we have held,
are to include $470,814 for 1995. Again, these figures would
seem to support tax-free return of basis treatment for the
$237,000 distribution amount during the company’s FYE 1995.
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