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November of 1991, the remaining Square Pan Pizza restaurants were
sold to Sbarro, Inc. (Sbarro), an unrelated entity. The sale of
these restaurants to Sbarro resulted in a taxable gain to Square
Pan of $1,417,271.
At the time of the sale to Sbarro, Partrick discussed the
$1,417,271 taxable gain with representatives of Arthur Andersen &
Co., who informed Partrick that deductions could be generated
that would offset the $1,417,271 taxable gain.
On May 4, 1992, at a special meeting of the board of
directors of Square Pan, the directors adopted a resolution that
purported to treat the $3,751,940 difference between
Peoplefeeders’ total cash receipts and Peoplefeeders’ expenses
and loan payments that had been paid out of the Intercompany bank
account as a $3,751,930 debt obligation of Peoplefeeders to
Square Pan and that purported to cancel that debt obligation as
uncollectible.2
In the resolution adopted by the board of directors, the
stated reason for the cancellation of the purported $3,751,930
debt obligation was that no repayments had ever been made by
Peoplefeeders on the purported debt obligation and that due to
the financial condition of Peoplefeeders there existed no
prospect of collecting any part of the debt obligation.
2 The $10 discrepancy between the $3,751,940 difference and
the $3,751,930 purported bad debt obligation is not explained in
the record. Hereinafter, we refer only to $3,751,930.
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