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each of the Zephyr purchasers reflecting cancellation of
indebtedness income.
On August 5, 1991, the Roses sold their home in New Jersey
for $422,500. The Roses purchased a home in Florida for $481,555
sometime between August 5, 1991, and March 16, 1992. The Roses
paid the entire $481,555 purchase price with cash from their
savings.
On December 31, 1991, PK Ventures’ financial books and
records indicated that Rose owed $437,469 to PK Ventures. This
balance was reduced to zero by “reclassifying” $400,000 as a bad
debt attributable to Rose’s portion of the $1 million that
PK Ventures had transferred to the Zephyr purchasers and by
“reclassifying” the remaining $37,469 as compensation expense
attributable to Rose.
A. As Described in the Financial Statements and Income Tax
Returns for PK Ventures and PKV&S
Note 3 to PK Ventures’ audited financial statements for the
year ended December 31, 1987, stated: “The company has advanced
$1,000,000 to the stockholders. This money was advanced for the
sole purpose to acquire a company that would be compatible with
the business objectives of the Company.” The same statement was
included in the notes to PK Ventures’ financial statements for
the years ended December 31, 1988, and December 31, 1989. A
$1 million amount “Due from stockholders” was listed as an asset
on PK Ventures’ audited financial statements for the years ended
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