Pk Ventures, Inc. v. Commissioner, Dkt. No. 5836-99.
| Decision Date | 28 March 2005 |
| Docket Number | Dkt. No. 6395-99.,Dkt. No. 10154-99.,Dkt. No. 5836-99. |
| Citation | 89 T.C.M. 880 |
| Parties | PK Ventures, Inc. and Subsidiaries, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Table of Contents
FINDINGS OF FACT
Background
A. Rose
B. Printon Kane and Co. and the Printon Kane Group, Inc
C. PK Ventures
D. PKVI LP
PK Ventures' Purchase of the Stock of SLPC, TBPC, TPC, and TPTC
Rose's Initial Receipt of an Equity Interest in PK Ventures
The Purchase of Zephyr
Transfers From PK Ventures, TBPC, and TPTC to Zephyr and Zephyr's Bankruptcy
A. As Described in the Business's Financial Statements and Income Tax Returns
1. 1987
2. 1988
3. 1989
4. 1990
B. Internal Revenue Service (IRS) Determinations
Rose's Acquisition of Control of PK Ventures and PKVI LP
Transfers From PK Ventures to the Zephyr Purchasers
A. As Described in the Financial Statements and Income Tax Returns for PK Ventures
and PKV&S
B. As Described in the Roses' Income Tax Returns
C. IRS Determinations
Transfers to PKVI LP
A. Transfers From Unrelated Parties to PKVI LP
B. Transfers From PK Ventures and/or Its Subsidiaries to PKVI LP
1. As Described in the Business's Financial Statements and Income Tax Returns
a. 1986
b. 1987
c. 1988
d. 1989
e. 1990
f. 1991
g. 1992
h. 1993
2. IRS Determinations
Other Circumstances Surrounding PK Ventures' Operations and Financial Arrangements
A. Going Concern Notes in the Business's Financial Statements
1. PK Ventures, SLPC, TBPC, and TPTC
2. PKVI LP
B. Litigation Involving SLPC, TBPC, and TPTC
C. Transfers From Rose to PK Ventures
Rose's Wages for 1986 Through 1993
A. Wages Received From Printon Kane and the Printon Kane Group
B. Wages Recorded on PK Ventures' Books and Records
C. Wages Reported on Income Tax Returns
D. IRS Determinations
PK Ventures' Share of PKVI LP's Items of Income and Loss
A. As Reported on PK Ventures' Schedules K-1
B. As Reported on the Income Tax Returns for PK Ventures and PKV&S
C. IRS Determinations
The Roses' Share of PKVI LP's Items of Income and Loss
A. As Reported on Rose's Schedules K-1
B. As Reported on the Roses' Income Tax Returns
C. IRS Determinations
The Roses' Share of Zephyr's Items of Income and Loss
A. As Reported on Rose's Schedules K-1
B. As Reported on the Roses' Income Tax Returns
C. IRS Determinations
Transactions Involving SLPC, TPC, and the Roses During 1994 and 1995
A. As Described in SLPC and the Roses' Income Tax Returns
B. IRS Determinations
Imposition of Accuracy-Related Penalties by the IRS
OPINION
Procedural Matters
Issues #1, #2, and #3
A. Transfers From PK Ventures to the Zephyr Purchasers
B. Transfers From PK Ventures, TBPC, and TPTC to PKVI LP
C. Transfers From PK Ventures, TBPC, and TPTC to Zephyr
D. The Consequences of These Transfers With Respect to the Roses
1. Transfers From PK Ventures to the Zephyr Purchasers
2. Transfers From PK Ventures to PKVI LP
Issues #4 and #5
A. Basis Calculations
1. The Calculation of PK Ventures' Basis in Its PKVI LP Interest and the Limitation
Imposed by Section 704(d) on PK Ventures' Share of PKVI LP's Deductible
Losses
2. The Calculation of the Roses' Basis in Their PKVI LP Interest and the Limitation
Imposed by Section 704(d) on the Roses' Share of PKVI LP's Deductible Losses
B. Our Consideration of the "At Risk" Rules
C. Conclusion
Issues #6 and #7
A. The Roses' Basis in Their Zephyr Interest
1. Preliminary Matter
2. The Parties' Contentions
3. The Amount of Zephyr's Discharge of Indebtedness Income
4. Conclusion
B. The Roses' Basis in Their SLPC Interest
Issue #8
Issue #9
Respondent determined deficiencies and penalties with respect to the Federal income taxes for petitioner PK Ventures, Inc. and Subsidiaries (PKV&S), for 1990, 1991, 1992, and 1993 as follows:
Penalty
Year Deficiency Sec. 6662(a)
1990 $211,278 $2,269
1991 791,480 9,517
1992 649,700 1,316
1993 750,743 --
By Notice of Final Partnership Administrative Adjustment dated January 11, 1999, respondent determined an upward adjustment of $100,661 with respect to the ordinary income of P.K. Ventures I Limited Partnership (PKVI LP) for 1991. Robert L. Rose (Rose), the designated tax matters partner for PKVI LP, filed a Petition for Readjustment of Partnership Items Under Code Section 6226.
Respondent determined deficiencies, an addition to tax, and penalties with respect to the Federal income taxes for petitioners Robert L. and Alice N. Rose (the Roses) for 1990, 1991, 1992, 1993, 1994, and 1995 as follows:
Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1990 $11,729 -- $2,346
1991 90,133 -- 18,027
1992 503,928 -- 100,786
1993 177,286 -- 35,457
1994 248,981 -- --
1995 397,096 $8,446 --
After concessions by the parties, the principal issues for decision in these consolidated cases are:
(1) Whether a transfer of $1 million from PK Ventures, Inc. (PK Ventures), to 10 individuals, 9 of whom were shareholders of PK Ventures, in 1987 to enable them to purchase Zephyr Rock & Lime, Inc. (Zephyr), was a bona fide loan and, if so, whether that debt ever became worthless (Issue #1);
(2) whether transfers of funds from PK Ventures and/or its subsidiaries to PKVI LP prior to and during 1990 and during 1991 were bona fide loans and, if so, whether such debts ever became worthless (Issue #2);
(3) whether transfers of funds from PK Ventures and two of its subsidiaries to Zephyr prior to 1990 were bona fide loans and, if so, whether such debts ever became worthless (Issue #3);
(4) whether PK Ventures had sufficient basis in its PKVI LP interest during 1990, 1991, 1992, and 1993 to deduct the losses that it claimed from PKVI LP on PKV&S's consolidated Federal income tax returns for those years (Issue #4);
(5) whether the Roses had sufficient basis in their PKVI LP interest during 1990, 1991, 1992, 1993, 1994, and 1995 to deduct the losses that they claimed from PKVI LP on their joint Federal income tax returns for those years (Issue #5);
(6) whether the Roses had sufficient basis in their Zephyr interest during 1990, 1991, and 1992 to deduct the losses that they claimed from that S corporation on their joint Federal income tax returns for those years (Issue #6);
(7) whether the Roses had sufficient basis in their St. Louis Pipeline Corp. interest during 1994 and 1995 to deduct the losses that they claimed from that S corporation on their joint Federal income tax returns for those years (Issue #7);
(8) whether the compensation that Rose received from PKV&S during 1992 and 1993 was reasonable (Issue #8); and
(9) whether the Roses are liable for accuracy-related penalties under section 6662(a) for 1990, 1991, 1992, and 1993 (Issue #9).
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Most amounts have been rounded to the nearest dollar.
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. The principal place of business of PKV&S was in Sarasota, Florida, at the time that the petition was filed at docket No. 5836-99. The principal place of business of PKVI LP was in Tampa, Florida, at the time that the petition was filed at docket No. 6395-99. The Roses resided in Florida at the time that the petition was filed at docket No. 10154-99.
Rose obtained a bachelor's degree in physics from Lancaster University in England, an M.B.A. and a master's degree in education from Lehigh University, and a master's degree from the University of Pennsylvania. Prior to 1985, Rose was employed by Evantash Associates, Chemical Bank, Soloman Bros., Thompson McKenan, Kidder Peabody, J.J. Lowry & Co., and Community College of Philadelphia, among others. Through his employment, Rose gained experience in budgeting, financial futures, hedging transactions, foreign currencies, and loan transactions.
Printon Kane and Co. (Printon Kane), a Delaware limited partnership, was, at all relevant times, in the business of dealing in bonds and other investment opportunities. Printon Kane's business was eventually transferred to the Printon Kane Group, Inc. (Printon Kane Group), a Delaware corporation, during 1989.
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