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return for 1990 for cash transfers that PK Ventures and/or its
subsidiaries had made to Zephyr because it had not established
that a true debtor-creditor relationship was intended by these
transfers. Furthermore, the IRS determined that, if a debt had
been intended, PKV&S had not established that such debt had
become worthless during 1990. Accordingly, the IRS increased
PKV&S’s taxable income by $64,888 for 1990.
The IRS determined that, with respect to the $64,888 of
transfers from PK Ventures and/or its subsidiaries to Zephyr for
which PKV&S had claimed a bad debt deduction on its consolidated
income tax return for 1990, 40 percent of that amount constituted
a constructive dividend to the Roses in 1990. Consequently, the
IRS increased the Roses’ taxable income by $25,955 for 1990.
Rose’s Acquisition of Control of PK Ventures and PKVI LP
At the beginning of 1990, PK Ventures was experiencing
difficulty servicing its debt. On February 16, 1990, Kane, Kane
Jr., Krutoy, Mannello, Rose, and PK Ventures executed a document
entitled “Agreement” (debt service agreement) whereby PK Ventures
agreed to repay the loans that it had outstanding with Norstar
and Summit Trust according to the schedule set forth in that
agreement. As of that date, PK Ventures had an $800,000
outstanding principal balance with respect to its $2.5 million
revolving line of credit with Norstar and had not repaid the
Summit Trust loan.
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