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PKV&S claimed a $664,888 bad debt deduction on its
consolidated income tax return for 1990 for cash transfers that
PK Ventures, TBPC, and TPTC had made to Zephyr and for the cash
transfers that PK Ventures had made to the nine Zephyr purchasers
other than Rose. With respect to this bad debt deduction,
$600,000 was attributable to the cash transfers that PK Ventures
had made to the nine Zephyr purchasers other than Rose. PKV&S
did not attach to this return an explanation for claiming this
bad debt deduction. 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 return
for 1990.
PKV&S claimed a bad debt expense of $1,712,151 on its
audited consolidated financial statements for the year ended
December 31, 1991. Of this amount, $400,000 was attributable to
the transfer that PK Ventures had made to Rose in connection with
the Zephyr purchase. Note 2 to these financial statements
offered the following explanation for PKV&S asserting a bad debt
expense with respect to this $400,000 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 was
due from the Company’s majority shareholder and netted
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