PK Ventures, Inc. and Subsidiaries, et al. - Page 102

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               C.  IRS Determinations                                                 
               The IRS determined that PKV&S was not allowed to claim bad             
          debt deductions of $600,000 and $400,000 on its consolidated                
          income tax returns for 1990 and 1991, respectively, for the cash            
          transfers that PK Ventures had made to the Zephyr purchasers                
          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 either               
          1990 or 1991.  Accordingly, the IRS increased PKV&S’s taxable               
          income by $600,000 for 1990 and by $400,000 for 1991.                       
               The IRS 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, the IRS                
          increased the Roses’ taxable income by $400,000 for 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.                                                            
          Transfers to PKVI LP                                                        
               A.  Transfers From Unrelated Parties to PKVI LP                        
               At the time of its organization, PKVI LP was engaged in the            
          acquisition of three hydroelectric projects that were located in            
          or near Bynum, North Carolina; Henrietta, North Carolina; and               
          Columbus, Georgia, respectively.  A small portion of the                    






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