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December 31, 1987, December 31, 1988, and December 31, 1989,
respectively.
A $1 million “Loans to stockholders” amount was listed as an
asset on the Schedules L attached to PKV&S’s consolidated income
tax returns for 1987, 1988, and 1989. There were no amounts
separately identified as interest payments received and/or
imputed by PK Ventures from the Zephyr purchasers on PKV&S’s
consolidated income tax returns for 1987 through 1989.
On its audited consolidated financial statements for the
year ended December 31, 1990, PKV&S claimed a bad debt expense of
$664,888, $600,000 of which was attributable to the transfers
that PK Ventures had made to the nine Zephyr purchasers other
than Rose. Note B to these financial statements offered the
following explanation for PKV&S asserting a bad debt expense with
respect to this $600,000 transfer:
The Company advanced $1,000,000 interest free to the
shareholders of the Company in 1987 which was invested
in Zephyr Rock & Lime, Inc. (“Zephyr”). In March 1990,
Zephyr sold all its assets and there were no funds left
to distribute to shareholders after paying liabilities.
Thereupon the Company ascertained that $600,000 of the
advances to shareholders was uncollectible and,
accordingly, charged $600,000 to 1990 operations. The
remaining balance of $400,000 at December 31, 1990 is
due from the Company’s majority shareholder and has
been netted against other advances from the
shareholder.
There is no explanation in these financial statements as to what
the balance of the $664,888 bad debt expense was attributable.
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