Pk Ventures, Inc. v. Commissioner, Dkt. No. 5836-99.
| Decision Date | 07 March 2006 |
| Docket Number | Dkt. No. 5836-99.,Dkt. No. 6395-99.,Dkt. No. 10154-99. |
| Citation | 91 T.C.M. 806 |
| Parties | PK Ventures, Inc. and Subsidiaries, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Table of Contents
FINDINGS OF FACT ........................................................................ 7
Background .......................................................................... 7
A. Rose .......................................................................... 7
B. Printon Kane and Co. and the Printon Kane Group, Inc. ......................... 8
C. PK Ventures ................................................................... 9
D. PKVI LP ....................................................................... 11
PK Ventures' Purchase of the Stock of SLPC, TBPC, TPC, and TPTC ..................... 15
Rose's Initial Receipt of an Equity Interest in PK Ventures ......................... 25
The Purchase of Zephyr .............................................................. 26
Transfers From PK Ventures, TBPC, and TPTC to Zephyr and Zephyr's Bankruptcy ........ 29
A. As Described in the Business's Financial Statements and Income Tax Returns .... 30
1. 1987 ....................................................................... 30
2. 1988 ....................................................................... 31
3. 1989 ....................................................................... 32
4. 1990 ....................................................................... 33
B. Internal Revenue Service (IRS) Determinations ................................. 34
Rose's Acquisition of Control of PK Ventures and PKVI LP ............................ 35
Transfers From PK Ventures to the Zephyr Purchasers ................................. 42
A. As Described in the Financial Statements and Income Tax Returns for PK Ventures
and PKV&S .................................................................... 43
B. As Described in the Roses' Income Tax Returns ................................. 46
C. IRS Determinations ............................................................ 47
Transfers to PKVI LP ................................................................ 47
A. Transfers From Unrelated Parties to PKVI LP ................................... 47
B. Transfers From PK Ventures and/or Its Subsidiaries to PKVI LP ................. 55
1. As Described in the Business's Financial Statements and Income Tax Returns 58
a. 1986 .................................................................... 58
b. 1987 .................................................................... 59
c. 1988 .................................................................... 60
d. 1989 .................................................................... 61
e. 1990 .................................................................... 63
f. 1991 .................................................................... 64
g. 1992 .................................................................... 66
h. 1993 .................................................................... 67
2. IRS Determinations ......................................................... 67
Other Circumstances Surrounding PK Ventures' Operations and Financial Arrangements .. 70
A. Going Concern Notes in the Business's Financial Statements .................... 70
1. PK Ventures, SLPC, TBPC, and TPTC .......................................... 70
2. PKVI LP .................................................................... 70
B. Litigation Involving SLPC, TBPC, and TPTC ..................................... 72
C. Transfers From Rose to PK Ventures ............................................ 73
Rose's Wages for 1986 Through 1993 .................................................. 74
A. Wages Received From Printon Kane and the Printon Kane Group ................... 76
B. Wages Recorded on PK Ventures' Books and Records .............................. 76
C. Wages Reported on Income Tax Returns .......................................... 79
D. IRS Determinations ............................................................ 82
PK Ventures' Share of PKVI LP's Items of Income and Loss ............................ 85
A. As Reported on PK Ventures' Schedules K-1 ..................................... 85
B. As Reported on the Income Tax Returns for PK Ventures and PKV&S ............... 86
C. IRS Determinations ............................................................ 87
The Roses' Share of PKVI LP's Items of Income and Loss .............................. 88
A. As Reported on Rose's Schedules K-1 ........................................... 88
B. As Reported on the Roses' Income Tax Returns .................................. 89
C. IRS Determinations ............................................................ 92
The Roses' Share of Zephyr's Items of Income and Loss ............................... 94
A. As Reported on Rose's Schedules K-1 ........................................... 94
B. As Reported on the Roses' Income Tax Returns .................................. 95
C. IRS Determinations ............................................................ 96
Transactions Involving SLPC, TPC, and the Roses During 1994 and 1995 ................ 97
A. As Described in SLPC and the Roses' Income Tax Returns ........................ 99
B. IRS Determinations ............................................................ 100
Imposition of Accuracy-Related Penalties by the IRS ................................. 101
OPINION ................................................................................. 102
Procedural Matters .................................................................. 102
Issue #1--Transfers From PK Ventures to the Zephyr Purchasers ....................... 104
Issue #2--Transfers From PK Ventures, TBPC, and TPTC to PKVI LP ..................... 111
Issue #3--Transfers From PK Ventures, TBPC, and TPTC to Zephyr ...................... 118
Issues #4 and #5--Partners' Basis in PKVI LP ........................................ 119
Issue #6--The Roses' Basis in Their Zephyr Interest ................................. 123
Issue #7--The Roses' Basis in Their SLPC Interest ................................... 132
Issue #8--Reasonable Compensation ................................................... 138
Issue #9--Penalties ................................................................. 151
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 (FPAA) 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 --
The principal issues tried and briefed in these consolidated cases were:
(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...
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