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It reported the following unappropriated retained earnings at the
beginning and end of each taxable year:
Beginning End
Taxable Year of year of year
1985 $168,435 $165,535
1986 165,535 400,485
1987 400,485 (971,002)
1988 (971,002) (6,858,975)
Petitioner reported negative taxable income on each of its
1985 through 1988 Federal income tax returns. Petitioner also
reported the following "gross receipts" and "cost of goods sold":
Taxable Year Gross receipts Cost of goods
1985 $307,524,610 $307,404,014
1986 521,391,751 520,838,947
1987 369,142,037 367,746,493
1988 175,924,620 175,473,765
On November 16, 1987, petitioner and the related entities
signed a settlement agreement with Bear Stearns, in which the
parties agreed to resolve all of their differences by
Kenilworth's paying Bear Stearns a $2.5 million debt owed to Bear
Stearns. Pursuant to this settlement agreement, all of the other
claimants paid or received nothing.
On April 29, 1988, Kenilworth filed a claim for arbitration
against Prudential Bache with the New York Stock Exchange, Inc.,
in which it alleged that Prudential Bache owed it over $3 million
as a result of transactions occurring in October 1987.
Petitioner and the other related entities later joined the claim
on the side of Kenilworth, and Prudential Bache filed a
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