PK Ventures, Inc. and Subsidiaries, et al. - Page 11

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               On the Schedule L attached to SLPC’s Form 1120S for 1995,              
          SLPC’s “Other current liabilities” were reported to be $2,208,733           
          as of the end of that year.  Of that amount, SLPC reported that             
          $2,171,155 was “DUE TO AFFILIATE”.  Also on this Schedule L,                
          SLPC’s “Loans from shareholders” were reported to equal                     
          $1,219,000 as of the end of 1995.  There were no amounts                    
          separately identified as interest payments made and/or imputed by           
          SLPC to the Roses on its Form 1120S for 1995.                               
               There were no amounts separately identified as interest                
          payments received and/or imputed by the Roses from SLPC on their            
          joint income tax return for 1995.                                           
               B.  IRS Determinations                                                 
               The IRS determined that the Roses could deduct the losses              
          that they reported from SLPC on their joint income tax returns              
          for 1994 and 1995 to the extent of the basis in their SLPC                  
          interest.  In calculating the Roses’ basis in their SLPC interest           
          for those years, the IRS determined that the $350,000 transaction           
          between TPC and SLPC in 1994 and the $800,000 transaction between           
          TPC and SLPC in 1995 did not constitute debt owed to the Roses              
          and did not increase the Roses’ basis in their SLPC interest.               
          The IRS determined that “there was not an actual economic outlay”           
          by the Roses and that “the debt was not directly attributable to”           
          the Roses.                                                                  







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