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1991, respectively, for the transfers from PK Ventures to the
Zephyr purchasers.
Respondent determined that PK Ventures’ transfer of $400,000
to Rose in connection with the Zephyr purchase constituted a
constructive dividend to him in 1990. Consequently, respondent
increased the Roses’ taxable income by $400,000 in 1990 and
determined that the Roses should not have reported $400,000 of
cancellation of indebtedness income on their joint income tax
return for 1991. We agree that the Roses should not have
reported $400,000 of cancellation of indebtedness income on their
joint income tax return for 1991 because, as we discussed above,
PK Ventures’ transfer of $400,000 to Rose in connection with the
Zephyr purchase was not a bona fide loan. With respect to
respondent’s treatment of the $400,000 transfer as a dividend
distribution in 1990, petitioners contend that, because the
transfer occurred in 1987, the transfer could only be a dividend
distribution to Rose in that year rather than in 1990.
Respondent has not offered an explanation as to why this $400,000
transfer should be treated as a dividend distribution to Rose in
1990. Because we have decided that the transfer from PK Ventures
to Rose in connection with the Zephyr purchase was not a bona
fide loan, we agree with petitioners, and we hold that the
transfer is not a dividend distribution to Rose in 1990 (or in
any of the other years before the Court in these cases). See
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