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Estate of Leavitt v. Commissioner
Citation:
875 F.2d 420 (1989)Facts
The appellants were shareholders of VAFLA Corporation, a subchapter S corporation incorporated in February 1979 to acquire and operate an amusement park in Florida. Each shareholder initially invested $10,000 in the corporation. In September 1979, VAFLA obtained a $300,000 loan from the Bank of Virginia after the shareholders signed guarantee agreements making them jointly and severally liable for the corporation’s indebtedness to the bank. At the time of the loan, VAFLA was in poor financial condition with liabilities exceeding assets and insufficient cash flow. Despite VAFLA’s financial statements indicating the loan was from the shareholders, all loan payments (principal and interest) were made by VAFLA directly to the bank, and neither VAFLA nor the shareholders treated these payments as constructive income to the shareholders. During 1979-1981, VAFLA incurred substantial operating losses, which the shareholders attempted to deduct on their personal tax returns beyond their initial $10,000 investment basis.
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