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conduct any market studies. The initial per-night rate of $70
per person purportedly covered lodging and meals and did not vary
by room. Mr. Ketter increased the per-night rate to $125 per
person in August 1989, to $175 per person on January 1, 1991, and
to $200 per person on January 1, 1992. Visitors to Granot Loma
enjoyed, for no additional charge, the Disney channel and other
entertainment channels, babysitters, shotgun shells, archery
targets and arrows, dry cleaning, and a variety of other items of
a personal nature.
All of LFI’s purported rental income came from BCC and other
companies owned or controlled by petitioner. The income,
however, was insufficient to cover LFI’s alleged expenses. LFI’s
cashflow deficits were funded through a shareholder’s loan
account, thus ensuring that Granot Loma had adequate cashflow to
cover expenses. BCC paid some of LFI’s invoices by intercompany
account transfers; others were paid by reducing LFI’s
indebtedness to BCC.
In the summer of 1990, petitioners held an auction to sell
off furniture and rugs at the lodge that had not been used in the
restoration. The auction raised a total of $309,386. The net
proceeds were applied to reduce LFI’s debt to BCC.8
8In a stipulation of settled issues, the parties agreed that
petitioner had additional capital gains of $261,889 arising from
the auction sale and that the auction sale proceeds were not
ordinary income to LFI.
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