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the Roses’ basis in their Zephyr interest was $810,431, which
included the following amounts:
Source Amount
Original investment $400,000
Note given to Mills 480,000
Constructive dividends 25,955
Loss deducted in 1988 (56,825)
Loss deducted in 1989 (38,699)
Furthermore, the IRS determined that, as of January 1, 1990, the
Roses had not deducted $1,532,106 of their share of the losses
that Zephyr had incurred during 1987, 1988, and 1989. After
taking into consideration the $11,941 loss that the Roses claimed
on their joint income tax return for 1990 with respect to their
interest in Zephyr, the IRS determined that the Roses could
deduct an additional $798,490 of Zephyr’s losses in that year.
The IRS determined that the Roses were not entitled to deduct any
additional amount of Zephyr’s losses on their joint income tax
returns for 1991 and 1992. Accordingly, the IRS decreased the
Roses’ taxable income by $798,490 for 1990 and increased the
Roses’ taxable income by $868,812 for 1991 and $651,355 for 1992.
Transactions Involving SLPC, TPC, and the Roses During 1994 and
1995
Effective January 1, 1994, PK Ventures and its subsidiaries
reorganized their corporate structure, which resulted in two
surviving corporations--SLPC and TPC. As of that date,
PK Ventures, TPTC, and TBPC were merged into TPC through
transfers of stock. Both SLPC and TPC elected to be treated as
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