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Petitioners urge that “common sense” requires a decision in
their favor. They argue that they incurred losses, not gains, on
the transactions leading to formation of the Sta-Home for-profit
entities. They point to balance sheets which show that the
liabilities they assumed exceeded the value of the assets they
acquired.
We disagree with petitioners’ so-called common sense
rationale. To the contrary, we think it obvious that a company’s
negative book value does not require a finding that the company
had a fair market value of less than zero. Nor does the fact
that a company operates at a loss mean that its intangible assets
have no value. Those assets are still capable of generating
revenue, thus proving they have value. Even petitioners’ tax
adviser, Pettis, testified to that effect.
Moreover, the Sta-Home tax-exempt entities’ assets generated
revenues of approximately $45 million in the year they were
transferred to the Sta-Home for-profit entities. The Sta-Home
tax-exempt entities reported a modest income from operations,
but, after deducting interest and depreciation (mostly for their
fleet of automobiles), they reported a loss of $506,713.
Although in 1995 they also reported an increase for the third
consecutive year in the negative net asset value to a new total
of $1,408,248, the evidence shows that their fourth employee
bonus in that year amounted to some $2,314,086. Had they not
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