t c memo united_states tax_court pk ventures inc and subsidiaries et al petitioners v commissioner of internal revenue respondent docket nos filed date b gray gibbs daniel c johnson and philip alan diamond for petitioners at trial sheldon m kay and thomas cullinan for petitioners on reconsideration kirk s chaberski and benjamin a de luna for respondent cases of the following petitioners are consolidated herewith p k ventures i limited_partnership robert l rose tax_matters_partner docket no robert l and alice n rose docket no this opinion supersedes tcmemo_2005_56 which is withdrawn by order served this date as a result of a motion for reconsideration filed subsequent to the release of tcmemo_2005_56 memorandum findings_of_fact and opinion table of contents findings_of_fact a b background rose printon kane and co and the printon kane group inc pk ventures pkvi lp c d 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 as described in the business’s financial statements and income_tax returns internal_revenue_service irs determinations rose’s acquisition of control of pk ventures and pkvi lp transfers from pk ventures to the zephyr purchasers as described in the financial statements and income_tax returns for pk ventures and pkv s as described in the roses’ income_tax returns irs determinations transfers to pkvi lp transfers from unrelated parties to pkvi lp a b a b c a b transfers from pk ventures and or its subsidiaries to pkvi lp as described in the business’s financial statements and income_tax returns a b c d e f g h irs determinations a b c a b c d other circumstances surrounding pk ventures’ operations and financial arrangements going concern notes in the business’s financial statements pk ventures slpc tbpc and tptc pkvi lp litigation involving slpc tbpc and tptc transfers from rose to pk ventures rose’s wages for through wages received from printon kane and the printon kane group wages recorded on pk ventures’ books_and_records wages reported on income_tax returns irs determinations pk ventures’ share of pkvi lp’s items of income and loss as reported on pk ventures’ schedules k-1 as reported on the income_tax returns for pk ventures and pkv s irs determinations a b c the roses’ share of pkvi lp’s items of income and loss as reported on rose’s schedules k-1 as reported on the roses’ income_tax returns irs determinations a b c the roses’ share of zephyr’s items of income and loss as reported on rose’s schedules k-1 as reported on the roses’ income_tax returns irs determinations a b c transactions involving slpc tpc and the roses during and a b as described in slpc and the roses’ income_tax returns irs determinations imposition of accuracy-related_penalties by the irs opinion procedural matters issue 1--transfers from pk ventures to the zephyr purchasers issue 2--transfers from pk ventures tbpc and tptc to pkvi lp issue 3--transfers from pk ventures tbpc and tptc to zephyr issues and 5--partners’ basis in pkvi lp issue 6--the roses’ basis in their zephyr interest issue 7--the roses’ basis in their slpc interest issue 8--reasonable compensation issue 9--penalties cohen judge respondent determined deficiencies and penalties with respect to the federal income taxes for petitioner pk ventures inc and subsidiaries pkv s for and as follows year deficiency dollar_figure big_number big_number big_number penalty sec_6662 dollar_figure big_number big_number -- by notice of final_partnership_administrative_adjustment fpaa dated date respondent determined an upward adjustment of dollar_figure with respect to the ordinary_income of p k ventures i limited_partnership pkvi lp for robert l rose rose the designated tax_matters_partner for pkvi lp filed a petition_for_readjustment of partnership items under code sec_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 and as follows year deficiency addition_to_tax sec_6651 penalty sec_6662 dollar_figure big_number big_number big_number big_number big_number -- -- -- -- -- dollar_figure dollar_figure big_number big_number big_number -- -- the principal issues tried and briefed in these consolidated cases were whether a transfer of dollar_figure million from pk ventures inc pk ventures to individuals of whom were shareholders of pk ventures in 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 whether transfers of funds from pk ventures and or its subsidiaries to pkvi lp prior to and during and during were bona_fide loans and if so whether such debts ever became worthless issue whether transfers of funds from pk ventures and two of its subsidiaries to zephyr prior to were bona_fide loans and if so whether such debts ever became worthless issue whether pk ventures had sufficient basis in its pkvi lp interest during and to deduct the losses that it claimed from pkvi lp on pkv s’s consolidated federal_income_tax returns for those years issue whether the roses had sufficient basis in their pkvi lp interest during and to deduct the losses that they claimed from pkvi lp on their joint federal_income_tax returns for those years issue whether the roses had sufficient basis in their zephyr interest during and to deduct the losses that they claimed from that s_corporation on their joint federal_income_tax returns for those years issue whether the roses had sufficient basis in their st louis pipeline corp interest during and to deduct the losses that they claimed from that s_corporation on their joint federal_income_tax returns for those years issue whether the compensation that rose received from pkv s during and was reasonable issue and whether the roses are liable for accuracy-related_penalties under sec_6662 for and issue 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 findings_of_fact 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 the principal_place_of_business of pkvi lp was in tampa florida at the time that the petition was filed at docket no the roses resided in florida at the time that the petition was filed at docket no background a rose 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 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 b printon kane and co and the printon kane group inc 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 rose began working for printon kane in and was a full-time_employee of printon kane through rose remained employed by printon kane during and by the printon kane group during and rose worked in the area of corporate finance at printon kane and the printon kane group in that capacity rose acted as a loan broker and would attempt to find lenders to fund small hydroelectric projects cogeneration projects and coal mining projects in addition rose’s duties at printon kane and the printon kane group included seeking out and developing investment opportunities for the firm c pk ventures on or about date pk ventures was organized as a delaware corporation for the purposes of acquiring owning leasing holding operating maintaining and disposing of assets such as pipelines and alternate energy facilities and engaging in any and all activities related or incidental thereto rose was responsible for organizing pk ventures as part of his duties to develop investment opportunities for printon kane sometime before rose organized pk ventures rose and printon kane’s management had agreed that he would receive an equity_interest in pk ventures as part of his compensation_for arranging this investment opportunity for the firm pk ventures was initially authorized to issue big_number shares of stock as of date pk ventures had issued all of those authorized shares to individuals these initial owners of pk ventures included g clifford mccarthy jr mccarthy and individuals who were either partners in or employees of printon kane--amos beason beason francis cerosky cerosky robert grimmig grimmig thomas kane kane thomas kane jr kane jr eugene kirkwood kirkwood louis krutoy krutoy joseph mannello mannello joel marshall marshall and john parker parker as of that date pk ventures’ stock was owned in the following proportions shareholder number of shares owned percentage of shares owned mccarthy beason cerosky grimmig kane kane jr kirkwood krutoy mannello marshall parker the purchase_price for these shares was dollar_figure per share on date rose was elected by the shareholders of pk ventures as its sole director rose then elected himself as the president treasurer and secretary of the corporation rose held the positions of sole director president treasurer and secretary of pk ventures and operated pk ventures out of his office at printon kane until he resigned from those positions in date krutoy replaced rose as president of pk ventures from date through date although he resigned the position of president of pk ventures rose continued to run the day-to-day operations of pk ventures from his office at printon kane or the printon kane group from date through date he then regained the positions of sole director and president of pk ventures and held those positions through rose’s duties for pk ventures and later for pk ventures and its wholly owned subsidiaries--st louis pipeline corp slpc tampa bay pipeline co tbpc tampa pipeline corp tpc and tampa pipeline transport co tptc --included handling cash management functions payroll insurance and risk management functions customer relations and marketing during and pk ventures operated as a c_corporation used the accrual_method of accounting and was the holding_company for slpc tbpc tpc and tptc during and pk ventures and its subsidiaries employed approximately people neither pk ventures nor any of its subsidiaries paid any dividends to their shareholders from through d pkvi lp on date rose as sole director of pk ventures adopted a resolution that pk ventures rose and herbert patrick patrick as general partners would form pkvi lp for the purposes of acquiring owning leasing holding operating maintaining mortgaging and disposing of hydroelectric cogeneration and other energy projects pkvi lp was subsequently organized as a delaware limited_partnership rose was responsible for organizing pkvi lp as part of his duties to develop investment opportunities for printon kane sometime before rose organized pkvi lp rose and printon kane’s management had agreed that he would receive an equity_interest in pkvi lp as part of his compensation_for arranging this investment opportunity for the firm the initial partners in pkvi lp included pk ventures patrick rose mccarthy and other individuals who were associated with printon kane--beason cerosky grimmig kane kane jr kirkwood krutoy mannello marshall and parker under the terms of the agreement of limited_partnership of pk ventures i limited_partnership agreement of limited_partnership these partners made initial capital contributions to pkvi lp in the following amounts and held the following interests in pkvi lp as of date partner pk ventures patrick rose mccarthy beason cerosky grimmig kane kane jr kirkwood krutoy mannello marshall parker initial capital_contribution participating percentage limited or general dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number general general general limited limited limited limited limited limited limited limited limited limited limited the initial capital contributions to pkvi lp totaled dollar_figure no other_amounts transferred to pkvi lp were identified as capital contributions on its books the terms of the agreement of limited_partnership required that as of the end of each fiscal_year of the partnership pkvi lp pay to each of its partners interest on their capital contributions as adjusted for any subsequent contributions and withdrawals at a rate equal to the greater of the prime rate as published in the wall street journal on the last business_day of the fiscal_year plu sec_2 percent or such other floating or fixed rate authorized by pk ventures the corporate general_partner of pkvi lp in their roles as general partners of pkvi lp patrick was responsible for the management of the partnership’s daily operations and rose was responsible for the partnership’s ongoing financial activities the terms of the agreement of limited_partnership provided that neither rose nor patrick would be compensated for their services to the partnership as corporate general_partner of pkvi lp pk ventures had inter alia the exclusive right power and authority to authorize distributions of cash on behalf of pkvi lp pk ventures also had the exclusive right power and authority subject_to written approval of the partnership’s limited partners holding at least percent of the aggregate voting percentages of the limited partners to do the following make calls for additional capital contributions on behalf of pkvi lp permit a withdrawal of capital by any partner admit an additional partner to the partnership permit the withdrawal of any partner from the partnership designate any additional investments for the partnership and determine the participating percentages of the partners in such additional investments sell or otherwise dispose_of all or substantially_all of the partnership’s property attributable to any investment permit any agreement between the partnership and any general_partner or any person controlled by or controlling or under common_control with a general_partner and permit the transfer or assignment in whole or in part by a partner of his interest in the partnership the terms of the agreement of limited_partnership provided that the general partners of pkvi lp were under no obligation to make any additional capital contributions to the partnership in response to any capital calls made on behalf of the partnership by pk ventures a general partner’s participating percentage could not be decreased as a result of not making any additional capital contributions to pkvi lp but it could be increased as a result of making such a contribution a limited partner’s participating percentage could be adjusted upward or remain the same if that partner did make an additional capital_contribution to pkvi lp in response to a capital call or it could be adjusted downward if that partner did not make an additional capital_contribution in response to a capital call patrick rose and pk ventures were the general partners of pkvi lp from date until sometime in during that time pk ventures owned a 1-percent interest rose owned a 30-percent interest and patrick owned a 40-percent interest sometime during patrick relinquished his interest in pkvi lp as a result of patrick’s withdrawal from pkvi lp rose and pk ventures became the partnership’s only general partners at that time rose held a 70-percent general_partnership interest in pkvi lp from date through date pk ventures was both a 1-percent general_partner and a 35-percent limited_partner of pkvi lp pk ventures’ purchase of the stock of slpc tbpc tpc and tptc on date pk ventures entered into separate stock purchase agreements for the purchase of percent of the outstanding_stock of slpc tbpc tpc and tptc at the time that pk ventures entered into these agreements slpc tbpc and tpc were owned by joyce western corp joyce western and tptc was owned by joyce western kathleen biondo christine joyce helma joyce and james joyce the tptc sellers at all relevant times these corporations were engaged in the following operations slpc owned a pipeline that transported aviation_fuel from illinois to the lambert airport in st louis missouri tbpc and tptc owned pipelines that transported anhydrous ammonia from the port of tampa bay florida to hillsborough county florida and polk county florida and tpc held a general_partnership interest and or a limited_partnership_interest in tampa pipeline limited_partnership a business that operated an aviation_fuel pipeline that serviced the tampa international airport as of date tbpc and tptc owned two of the four existing anhydrous ammonia pipelines in the united_states also as of that date tbpc had leased the use of its pipeline to w r grace co and royster co royster and tptc had leased the use of its pipeline to international minerals chemical corp under the terms of the stock purchase agreements pk ventures agreed to pay the following base purchase prices for the stock of slpc tbpc tpc and tptc corporation base purchase_price slpc tbpc tpc tptc dollar_figure big_number big_number big_number the parties agreed that these base purchase prices would be adjusted to reflect the amount by which each corporation’s current_assets differed from its current liabilities as of the closing date on date pk ventures agreed to pay to joyce western the following portions of the base purchase prices for the stock of slpc tbpc and tpc on the transaction’s closing date corporation amount_paid slpc tbpc tpc dollar_figure big_number big_number in addition pk ventures agreed to deliver to joyce western nonnegotiable promissory notes in the following principal amounts for the balances of the base purchase prices corporation promissory note amount slpc tbpc tpc dollar_figure big_number big_number also on date pk ventures entered into an interim loan agreement ila with norstar bank norstar in connection with its purchase of the stock of slpc tbpc tpc and tptc the ila was a precursor to the permanent financing_arrangement that pk ventures was to enter into with norstar in connection with this transaction the ila required norstar inter alia to make a loan to pk ventures in the form of a revolving line of credit in the maximum principal_amount of dollar_figure million this loan was secured_by an irrevocable letter_of_credit that the summit trust co summit trust issued in favor of pk ventures on date the terms of the loan required that all outstanding principal amounts bear interest at a rate equal to three-fourths of percent above norstar’s stated prime rate that payments of accrued interest and outstanding principal amounts be made monthly and that the entire outstanding principal balance plus accrued interest become due and payable at the time that the permanent financing was finalized advances under this loan were to be made inter alia to pay to james joyce or joyce western a total of dollar_figure in two installments--dollar_figure was due to be paid at the closing of the loan and the balance was due to be paid at the earlier of the closing of the permanent financing or date the ila also set forth the details of the permanent financing_arrangement that was being negotiated between pk ventures and norstar as set forth in the ila norstar had agreed to make one term_loan to slpc in the amount of dollar_figure million and one or more term loans to tbpc tpc and or tptc in the total amount of dollar_figure million the purpose of these term loans was inter alia to refinance the indebtedness that slpc tbpc tpc and tptc owed to norstar in addition to these term loans norstar agreed to establish a 5-year revolving line of credit in the maximum principal_amount of dollar_figure million for pk ventures dollar_figure million revolving line of credit under the terms of the permanent financing_arrangement the term loans to slpc tbpc tpc and tptc and the first dollar_figure million of outstanding principal on the dollar_figure million revolving line of credit were to be secured_by a pledge of all of the stock of slpc tbpc tpc and tptc as well as a first mortgage on and security_interest in all of the assets of those corporations on date pk ventures closed on the purchase of the stock of slpc tbpc and tpc from joyce western on that date pk ventures executed documents entitled non-negotiable promissory note in favor of joyce western for the balances of the base purchase prices for the stock of slpc tbpc and tpc the terms of the non-negotiable promissory note for the balance of the base purchase_price for the stock of slpc required that the principal_amount bear interest at a rate of percent that a dollar_figure principal installment_payment be made on date and that the remaining principal balance plus accrued interest become due and payable no later than date the terms of the non-negotiable promissory note for the balance of the base purchase_price for the stock of tbpc required that the principal_amount bear interest at a rate of percent that a dollar_figure principal installment_payment be made on date and that the remaining principal balance plus accrued interest become due and payable no later than date the terms of the non-negotiable promissory note for the balance of the base purchase_price for the stock of tpc required that the principal_amount bear interest at a rate of percent that a dollar_figure principal installment_payment be made on date and that the remaining principal balance plus accrued interest become due and payable no later than date these promissory notes were subordinate to the indebtedness incurred by pk ventures slpc tbpc tpc and tptc to norstar in connection with pk ventures’ acquisition of slpc tbpc tpc and tptc also on date pk ventures executed documents entitled subordinated note in favor of the tptc sellers in exchange for the stock of tptc the subordinated notes were issued in the following amounts and were in the aggregate equal to the base purchase_price for the stock of tptc tptc seller subordinated note amount joyce western kathleen biondo christine joyce helma joyce james joyce dollar_figure big_number big_number big_number big_number the terms of the subordinated notes required that the principal balances bear interest at a rate of percent that payments of accrued interest be made monthly beginning on date and that the principal balances become due and payable on date the subordinated notes were subordinate to the indebtedness incurred by pk ventures slpc tbpc tpc and tptc to norstar in connection with pk ventures’ acquisition of slpc tbpc tpc and tptc on or about date slpc tbpc and tptc executed documents entitled promissory note in favor of norstar in which they promised to pay to norstar the principal amounts of dollar_figure million dollar_figure million and dollar_figure million respectively the terms of slpc’s promissory note to norstar required that the outstanding principal balance bear interest at a rate of dollar_figure percent that the interest on the outstanding principal_amount be calculated on the basis of a 360-day year that payments of principal and accrued interest be made in equal quarterly installments of dollar_figure beginning on date and that any remaining balance of principal and accrued interest become due and payable on date the terms of tbpc’s promissory note to norstar required that the outstanding principal balance bear interest at a rate of dollar_figure percent that the interest on the outstanding principal_amount be calculated on the basis of a 360-day year that payments of principal and accrued interest be made in equal monthly installments of dollar_figure beginning on date and that any remaining balance of principal and accrued interest become due and payable on date the terms of tptc’s promissory note to norstar required that the outstanding principal balance bear interest at a rate of dollar_figure percent that the interest on the outstanding principal_amount be calculated on the basis of a 360-day year that payments of principal and accrued interest be made in equal monthly installments of dollar_figure beginning on date and that any remaining balance of principal and accrued interest become due and payable on date also on or about date pk ventures executed a document entitled master note in favor of norstar in which it promised to pay to norstar the principal_amount of dollar_figure million or if less the aggregate unpaid principal_amount of all advances made by norstar to pk ventures under the dollar_figure million revolving line of credit the terms of this master note required that all outstanding principal amounts bear interest at a rate equal to three-fourths of percent above norstar’s stated prime rate that the interest on the outstanding principal amounts be calculated on the basis of a 360-day year that pk ventures make payments of all accrued interest on the outstanding principal amounts on a monthly basis and that the line of credit expire on date with all amounts thereunder becoming immediately due and payable on date norstar sent a letter to rose to inform him that it had transferred a total of dollar_figure million in loan proceeds to pk ventures’ norstar account this letter indicated that effective date norstar had advanced the following loans borrower loan amount slpc tbpc tptc pk ventures dollar_figure big_number big_number big_number norstar made the dollar_figure advance to pk ventures under the dollar_figure million revolving line of credit in addition the letter indicated that norstar had closed-out previously outstanding notes of slpc tbpc tpc and tptc totaling dollar_figure pursuant to rose’s instructions norstar debited pk ventures’ account for this amount on or about date tbpc executed a document entitled restated promissory note in favor of contel credit corp contel in which it promised to pay to contel the principal_amount of dollar_figure million this restated promissory note restated and superseded the promissory note that tbpc had executed in favor of norstar on date in the original principal_amount of dollar_figure million the terms of the restated promissory note required that the outstanding principal balance bear interest at a rate of percent through date and dollar_figure percent thereafter that the interest on the outstanding principal_amount be calculated on the basis of a 360-day year that payments of principal and accrued interest be made monthly beginning on date and that any remaining balance of principal and accrued interest become due and payable on date also on or about date tptc executed a document entitled consolidation note in favor of contel in which it promised to pay to contel the principal_amount of dollar_figure million the principal_amount of this consolidation note included and consolidated the principal balance of the promissory note that tptc had executed in favor of norstar on date in the original principal_amount of dollar_figure million as well as the principal balance of an additional advance note that tptc had executed in favor of contel in the original principal_amount of dollar_figure million the terms of the consolidation note required that the outstanding principal balance bear interest at a rate of percent through date and dollar_figure percent thereafter that the interest on the outstanding principal_amount be calculated on the basis of a 360-day year that payments of principal and accrued interest be made monthly beginning on date and that any remaining balance of principal and accrued interest become due and payable on date also on or about date pk ventures agreed to guarantee the loans between tbpc and contel and between tptc and contel collectively the contel debt and to pledge all of the stock of tbpc tpc and tptc to secure the contel debt in addition tbpc tpc and tptc agreed to encumber all of their assets to secure the contel debt and pk ventures decided that tbpc tpc and tptc no longer had to guarantee or to secure the first dollar_figure million of outstanding principal on the dollar_figure million revolving line of credit or any other indebtedness owed by slpc tbpc tpc or tptc to norstar pk ventures also decided that slpc no longer had to guarantee or to secure the first dollar_figure million of outstanding principal on the revolving line of credit pk ventures slpc tbpc tpc and tptc jointly referred to as petitioner pkv s filed consolidated federal_income_tax returns for through prior to pk ventures slpc tbpc tpc and tptc each prepared separate financial statements beginning in and continuing through pk ventures slpc tbpc tpc and tptc prepared consolidated financial statements these consolidated financial statements will be referred to as pkv s’s consolidated financial statements any references to pk ventures in this opinion should not be construed to include its subsidiaries rose’s initial receipt of an equity_interest in pk ventures on or about date pk ventures adopted a resolution to amend its certificate of incorporation to increase the number of shares of stock that it was authorized to issue from big_number to big_number in connection with this amendment the shares of pk ventures stock owned by parker and the shares of pk ventures stock owned by cerosky were redeemed by pk ventures at a price of dollar_figure per share also in connection with this amendment rose and the pk ventures shareholders were given the opportunity to purchase big_number shares of pk ventures stock at a price of dollar_figure per share as a result of these transactions the stock of pk ventures was owned in the following proportions as of date shareholder additional shares acquired total shares owned after acquisition percentage of shares owned after acquisition mccarthy beason grimmig kane kane jr kirkwood krutoy mannello marshall rose total big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the purchase of zephyr zephyr a florida corporation operated as an s_corporation during zephyr’s primary business was mining processing and selling limestone from a quarry that it owned in pasco county florida as of date zephyr’s balance sheets showed that its current liabilities exceeded its current_assets by dollar_figure sometime before date pk ventures entered into a stock purchase agreement with elli m a mills mills to purchase all of zephyr’s issued and outstanding_stock prior to closing this agreement it was decided that for certain business and tax reasons pk ventures would assign its rights under the stock purchase agreement to individuals--beason cerosky grimmig kane kane jr krutoy mannello marshall mccarthy and rose collectively the zephyr purchasers --9 of whom were shareholders of pk ventures ie cerosky was no longer a shareholder of pk ventures and of whom were associated with printon kane mccarthy was neither a partner in nor an employee of printon kane on or about date pk ventures transferred dollar_figure million to the zephyr purchasers of this dollar_figure million rose received dollar_figure rose and the other zephyr purchasers used this dollar_figure million to purchase zephyr’s stock from mills to cure delinquent payments to zephyr’s creditors and to provide zephyr with working_capital as of date the zephyr purchasers owned interests in zephyr and in pk ventures as follows shareholder zephyr shares owned percentage of zephyr owned percentage of pk ventures owned beason cerosky grimmig kane kane jr krutoy mannello marshall mccarthy rose total big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure pk ventures obtained the dollar_figure million that it transferred to the zephyr purchasers from summit trust summit trust loan an entity named printon kane government securities pledged a dollar_figure million certificate of deposit as collateral for the summit trust loan pk ventures accounted for the summit trust loan by crediting a liability account due to summit trust and debiting an asset account due from shareholders also on or about date pk ventures and zephyr agreed to enter into a management and guaranty inducement agreement under the terms of the management and guaranty inducement agreement pk ventures and zephyr agreed that pk ventures would provide certain management services to zephyr guarantee certain debts of zephyr and the zephyr purchasers and indemnify mills with respect to his existing guarantees of zephyr’s debt in connection with the management and guaranty inducement agreement pk ventures agreed to guarantee the following dollar_figure of the purchase_price to be paid_by the zephyr purchasers for zephyr’s stock payment of the amounts due under zephyr’s promissory note to ncnb national bank of florida in the original principal_amount of dollar_figure payment of the amounts due under zephyr’s promissory note to southeast bank n a in the principal_amount dollar_figure and liabilities that zephyr incurred in the ordinary course of its business on or about date summit trust approved a 6-month renewal of the summit trust loan the terms of the renewal required that the principal balance of the summit trust loan bear interest at a rate of percent over the rate of the dollar_figure million certificate of deposit being held as collateral that payments of accrued interest be made monthly beginning on date and that the principal balance and accrued interest become due and payable on date on or about date the summit trust loan was renewed until date under terms similar to those contained in the renewal of date transfers from pk ventures tbpc and tptc to zephyr and zephyr’s bankruptcy after its acquisition by the zephyr purchasers in zephyr continued to operate as a limestone mining business during and zephyr received transfers totaling dollar_figure from the following sources source amount printon kane pk ventures tbpc tptc dollar_figure big_number big_number big_number during zephyr unsuccessfully attempted to obtain financing from itt commercial finance corp and tarmac florida inc on date zephyr filed for bankruptcy under chapter of the bankruptcy code among the creditors listed in its bankruptcy documents were printon kane pk ventures tbpc and tptc the bankruptcy documents indicated that pk ventures tbpc and tptc had transferred dollar_figure to zephyr as set forth above pk ventures tbpc and tptc each filed claims in zephyr’s bankruptcy proceeding on date copies of canceled checks and promissory notes were attached to each of these claims as substantiation of the amounts owed zephyr’s bankruptcy was finalized in late sometime between the time that the bankruptcy was finalized and the end of date a third party purchased zephyr’s assets and the proceeds of that sale were distributed to specific secured and unsecured creditors of zephyr neither printon kane pk ventures tbpc nor tptc received any of those proceeds as of date the general ledger account used by pk ventures to account for certain transfers that it had made to zephyr had a net or remaining balance of dollar_figure a as described in the business’s financial statements and income_tax return sec_1 no direct references were made and no explanations were provided in zephyr’s form_1120s u s income_tax return for an s_corporation for as to the amounts that zephyr received from printon kane pk ventures tbpc or tptc during that year on the schedule l balance sheets attached to that return zephyr reported dollar_figure of mortgages notes bonds payable in less than year and dollar_figure of mortgages notes bonds payable in year or more as of the end of there were no amounts separately identified as interest payments made and or imputed by zephyr to pk ventures tbpc or tptc on zephyr’s form_1120s for no direct references were made and no explanations were provided in pk ventures tbpc or tptc’s financial statements for the year ended date as to the amounts that pk ventures tbpc and tptc transferred to zephyr during that year no direct references were made and no explanations were provided in pkv s’s consolidated_income_tax_return for as to the amounts that pk ventures tbpc and tptc transferred to zephyr during that year there were also no amounts separately identified as interest payments received and or imputed by pk ventures tbpc or tptc from zephyr on pkv s’s consolidated_income_tax_return for no direct references were made and no explanations were provided in zephyr’s form_1120s for as to the amounts that zephyr received from printon kane pk ventures tbpc or tptc during that year on the schedule l attached to that return zephyr reported dollar_figure of mortgages notes bonds payable in less than year dollar_figure of other current liabilities and dollar_figure of mortgages notes bonds payable in year or more as of the end of there were no amounts separately identified as interest payments made and or imputed by zephyr to pk ventures tbpc or tptc on zephyr’s form_1120s for no direct references were made and no explanations were provided in pk ventures tbpc or tptc’s financial statements for the year ended date as to the amounts that pk ventures tbpc and tptc transferred to zephyr during that year furthermore no mention of zephyr’s bankruptcy was made in pk ventures tbpc or tptc’s financial statements for the year ended date on the schedule l attached to pkv s’s consolidated_income_tax_return for tbpc and tptc reported a total of dollar_figure due from zephyr under other assets as of the end of that year of this amount dollar_figure was attributable to tbpc and dollar_figure was attributable to tptc these amounts were described as due from unconsolidated subsidiaries there were no amounts separately identified as interest payments received and or imputed by pk ventures tbpc or tptc from zephyr on pkv s’s consolidated_income_tax_return for no direct references were made and no explanations were provided in zephyr’s form_1120s for as to the amounts that zephyr received from printon kane pk ventures tbpc or tptc during that year furthermore no schedule l was attached to this return there were no amounts separately identified as interest payments made and or imputed by zephyr to pk ventures tbpc or tptc on zephyr’s form_1120s for no direct references were made and no explanations were provided in pk ventures tbpc or tptc’s financial statements for the year ended date as to the amounts that pk ventures tbpc and tptc transferred to zephyr during that year furthermore no mention of zephyr’s bankruptcy was made in pk ventures tbpc or tptc’s financial statements for the year ended date pkv s claimed a dollar_figure bad_debt deduction on its consolidated_income_tax_return for for cash transfers that pk ventures tbpc and tptc had made to zephyr pkv s did not attach to this return an explanation for claiming this bad_debt deduction on the schedule l attached to pkv s’s consolidated_income_tax_return for pk ventures and its subsidiaries reported a total of dollar_figure due from zephyr under other assets as of the end of that year this amount was described as due from unconsolidated subsidiaries there were no amounts separately identified as interest payments received and or imputed by pk ventures tbpc or tptc from zephyr on pkv s’s consolidated_income_tax_return for on its form_1120s for zephyr represented that no income or expense items where sic reported on the tax_return due to the fact that the corporation was not solvent after the completion of the bankruptcy pkv s claimed a dollar_figure bad_debt deduction on its consolidated_income_tax_return for 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 dollar_figure was attributable to the cash transfers that pk ventures and or its subsidiaries had made to zephyr in prior years pkv s did not attach to this return an explanation for claiming this bad_debt deduction b internal_revenue_service irs determinations the irs determined that pkv s was not allowed to claim a bad_debt deduction of dollar_figure on its consolidated_income_tax_return for for cash transfers that pk ventures and or its subsidiaries had made to zephyr 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 the effect of this determination was to reduce the net_operating_loss_carryover that pkv s could report on its consolidated_income_tax_return for as amended from dollar_figure to dollar_figure accordingly the irs increased pkv s’s taxable_income by dollar_figure for the irs also determined that pkv s was not allowed to claim a bad_debt deduction of dollar_figure on its consolidated_income_tax_return for for cash transfers that pk ventures and or its subsidiaries had made to zephyr 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 accordingly the irs increased pkv s’s taxable_income by dollar_figure for the irs determined that with respect to the dollar_figure of transfers from pk ventures and or its subsidiaries to zephyr for which pkv s had claimed a bad_debt deduction on its consolidated_income_tax_return for percent of that amount constituted a constructive_dividend to the roses in consequently the irs increased the roses’ taxable_income by dollar_figure for rose’s acquisition of control of pk ventures and pkvi lp at the beginning of pk ventures was experiencing difficulty servicing its debt on date kane kane jr krutoy mannello rose and pk ventures executed a document entitled agreement debt service agreement whereby pk ventures agreed to repay the loans that it had outstanding with norstar and summit trust according to the schedule set forth in that agreement as of that date pk ventures had an dollar_figure outstanding principal balance with respect to its dollar_figure million revolving line of credit with norstar and had not repaid the summit trust loan according to the schedule set forth in the debt service agreement pk ventures agreed to pay the outstanding principal balance of the dollar_figure million revolving line of credit plus any accrued interest within days from the date of the debt service agreement furthermore pk ventures agreed to make a dollar_figure payment on the summit trust loan at the earlier of date or the date that rose acquired a majority interest in pk ventures pk ventures was to repay the remaining dollar_figure of the summit trust loan at the loan’s maturity_date months from the date of the debt service agreement or as extended by summit trust the debt service agreement also contained the following provision compensation until date robert rose’s salary as chief_executive_officer will be fixed at dollar_figure per annum payable bi-weekly the debt service agreement provided that pk ventures was to borrow funds from rose if it did not have sufficient funds to make the scheduled payments to norstar and summit trust if pk ventures borrowed any funds from rose it was required to execute a promissory note in rose’s favor and to secure repayment of the loan by placing a priority lien as permitted on all of its assets in addition any such loans between rose and pk ventures were to be secured_by an escalating pledge of the shares of pk ventures’ stock owned by kane kane jr krutoy and mannello in an amount identified in a pledge agreement certificates of deposit had been pledged as security for the loans that pk ventures had taken out with norstar and summit trust specifically an dollar_figure certificate of deposit secured the outstanding principal balance of the dollar_figure million revolving line of credit and a dollar_figure million certificate of deposit from printon kane government securities secured the summit trust loan under the terms of the debt service agreement pk ventures was to instruct norstar and summit trust to release a like amount of the certificates of deposit that they had been holding as collateral to the receiving agent for kane kane jr krutoy and mannello as it made the scheduled payments to these institutions as contemplated by the debt service agreement pk ventures borrowed dollar_figure from rose on date in order to make its scheduled payment to norstar rose obtained a portion of the funds for this loan by placing a dollar_figure mortgage on his new jersey residence with first fidelity bank first fidelity rose gathered the remaining dollar_figure for this loan from other sources in exchange for this dollar_figure loan pk ventures executed documents entitled promissory note and security_agreement in favor of rose the terms of the promissory note required that the principal_amount bear interest at a rate equal to percent above first fidelity’s stated prime rate that pk ventures make payments of accrued interest on a monthly basis beginning date and that the principal balance become due and payable on date in addition kane kane jr krutoy and mannello executed a document entitled pledge agreement in favor of rose under the terms of the pledge agreement kane kane jr krutoy and mannello agreed to pledge percent of their total shares of pk ventures’ stock to rose in order to secure repayment of rose’s dollar_figure loan to pk ventures as a result of entering into the pledge agreement kane kane jr krutoy and mannello pledged a combined total of dollar_figure shares of pk ventures’ stock to rose also on date kane kane jr krutoy and mannello executed a document entitled voting_trust agreement whereby they agreed to place all of their shares of pk ventures’ stock into a voting_trust in exchange for voting_trust_certificates the voting_trust_certificates indicated their ownership rights in the shares of stock held by the trustee rose was designated as trustee of this voting_trust and was given sole authority to vote the shares as trustee of the voting_trust rose had voting rights to dollar_figure percent of the shares of pk ventures’ stock the voting_trust agreement granted rose voting rights to dollar_figure percent of pk ventures’ stock he already held voting rights to percent of the shares of pk ventures’ stock prior to becoming trustee of the voting_trust the shares of pk ventures’ stock placed into the voting_trust included the shares that had been pledged to rose under the pledge agreement the voting_trust was to last for years from date unless terminated earlier by the death resignation or incapacity of rose also on date kane kane jr krutoy and mannello executed documents entitled assignment whereby they agreed to transfer all of their respective interests in pkvi lp to pk ventures in sum they transferred a 748-percent limited_partnership_interest in pkvi lp to pk ventures with that transfer pk ventures held a 098-percent limited_partnership_interest and a 1-percent general_partnership interest in pkvi lp pk ventures satisfied its obligation to norstar with the dollar_figure loan that it received from rose pk ventures repaid this loan by making various cash payments to rose and to first fidelity on date a document entitled stock_redemption agreement was executed by cerosky as a holder of an interest in pkvi lp the shareholders of pk ventures ie beason grimmig kane kane jr kirkwood krutoy mannello marshall mccarthy and rose and pk ventures under the terms of the stock_redemption agreement pk ventures agreed to redeem a total of big_number shares of its stock from the shareholders of pk ventures other than rose the withdrawing shareholders the withdrawing shareholders agreed to sell assign and transfer their ownership interests in all of pk ventures’ subsidiaries ie slpc tbpc tpc and tptc to pk ventures and beason cerosky grimmig kirkwood marshall and mccarthy agreed to transfer their ownership interests in pkvi lp to pk ventures at the completion of the stock_redemption on date kane and rose were the only shareholders of pk ventures with rose owning percent of pk ventures’ outstanding shares rose and pk ventures also became the only owners of pkvi lp in sum beason cerosky grimmig kirkwood marshall and mccarthy transferred a 902-percent limited_partnership_interest in pkvi lp to pk ventures consequently as of date pk ventures owned a 1-percent general_partnership interest and the entire 29-percent limited_partnership_interest in pkvi lp and rose owned a 70-percent general_partnership interest in pkvi lp as consideration for the stock_redemption and purchases described above pk ventures agreed to repay the summit trust loan based on the following schedule dollar_figure on date dollar_figure within months of date and dollar_figure within year of date in addition pk ventures agreed to instruct summit trust to release a like amount of the dollar_figure million certificate of deposit that it held as collateral for the summit trust loan to the receiving agent for the withdrawing shareholders with each scheduled payment that it made the parties to the stock_redemption agreement also agreed as follows release the company rose and the shareholders acknowledge that there are certain obligations and indebtedness existing between rose and the company on the one hand and the shareholders on the other hand it is the intent of the parties in executing this agreement that all such debts and obligations except as otherwise provided herein be hereby expressly extinguished accordingly the shareholders hereby release rose and the company and the company and rose jointly and severally release the shareholders with respect to any and all claims which the shareholders on the one hand may have against rose and or the company including obligations of the company to repay the indebtedness to summit as set forth in the agreement among rose the certificate holders and the company dated date or respecting claims which rose and or the company may have against the shareholders excepting as to all parties claims and obligations arising pursuant to this agreement the pledge agreement the voting_trust agreement and any agreement executed in conjunction with this agreement in accordance with the stock_redemption agreement rose loaned dollar_figure to pk ventures on date rose paid the dollar_figure directly to summit trust rose refinanced his new jersey home in order to obtain the funds for this loan in exchange for the dollar_figure loan pk ventures gave rose a promissory note pk ventures accounted for the promissory note by debiting the liability account to summit trust and crediting the account due to from pkv rlr pk ventures repaid the dollar_figure directly to rose’s mortgagee the series of agreements executed on date were amended but not voided by the stock_redemption agreement under the terms of the stock_redemption agreement the shares of pk ventures’ stock that were not redeemed from kane remained subject_to both the voting_trust agreement and the pledge agreement also on date rose pk ventures and the printon kane group executed a document entitled agreement litigation agreement whereby they agreed to share the litigation costs incurred to sue raymond james associates the litigation subject_to the litigation agreement involved the business and activities of zephyr as a result of zephyr’s bankruptcy the zephyr purchasers had lost all of the cash that they had contributed to zephyr transfers from pk ventures to the zephyr purchasers pk ventures did not receive promissory notes from the zephyr purchasers in exchange for the dollar_figure million that it transferred to them no accrued interest attributable to this transfer was posted to pk ventures’ general ledger or reported in its audited financial statements the zephyr purchasers did not repay any portion of the dollar_figure million that had been transferred to them from pk ventures pk ventures neither took legal action against the zephyr purchasers to force repayment of the dollar_figure million transfer nor did it attempt to negotiate a partial collection of this amount with any of the zephyr purchasers pk ventures issued forms to each of the zephyr purchasers reflecting cancellation_of_indebtedness_income on date the roses sold their home in new jersey for dollar_figure the roses purchased a home in florida for dollar_figure sometime between date and date the roses paid the entire dollar_figure purchase_price with cash from their savings on date pk ventures’ financial books_and_records indicated that rose owed dollar_figure to pk ventures this balance was reduced to zero by reclassifying dollar_figure as a bad_debt attributable to rose’s portion of the dollar_figure million that pk ventures had transferred to the zephyr purchasers and by reclassifying the remaining dollar_figure as compensation expense attributable to rose a as described in the financial statements and income_tax returns for pk ventures and pkv s note to pk ventures’ audited financial statements for the year ended date stated the company has advanced dollar_figure to the stockholders this money was advanced for the sole purpose to acquire a company that would be compatible with the business objectives of the company the same statement was included in the notes to pk ventures’ financial statements for the years ended date and date a dollar_figure million amount due from stockholders was listed as an asset on pk ventures’ audited financial statements for the years ended date date and date respectively a dollar_figure million loans to stockholders amount was listed as an asset on the schedules l attached to pkv s’s consolidated income_tax returns for and 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 returns for through on its audited consolidated financial statements for the year ended date pkv s claimed a bad_debt expense of dollar_figure dollar_figure of which was attributable to the transfers that pk ventures had made to the nine zephyr purchasers other than rose note b to these financial statements offered the following explanation for pkv s asserting a bad_debt expense with respect to this dollar_figure transfer the company advanced dollar_figure interest free to the shareholders of the company in which was invested in zephyr rock lime inc zephyr in date zephyr sold all its assets and there were no funds left to distribute to shareholders after paying liabilities thereupon the company ascertained that dollar_figure of the advances to shareholders was uncollectible and accordingly charged dollar_figure to operations the remaining balance of dollar_figure at date is due from the company’s majority shareholder and has been netted against other advances from the shareholder there is no explanation in these financial statements as to what the balance of the dollar_figure bad_debt expense was attributable pkv s claimed a dollar_figure bad_debt deduction on its consolidated_income_tax_return for 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 dollar_figure 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 pkv s claimed a bad_debt expense of dollar_figure on its audited consolidated financial statements for the year ended date of this amount dollar_figure was attributable to the transfer that pk ventures had made to rose in connection with the zephyr purchase note to these financial statements offered the following explanation for pkv s asserting a bad_debt expense with respect to this dollar_figure transfer the company advanced dollar_figure interest free to the shareholders of the company in which was invested in zephyr rock lime inc zephyr in date zephyr sold all its assets and there were no funds left to distribute to shareholders after paying liabilities thereupon the company ascertained that dollar_figure of the advances to shareholders was uncollectible and accordingly charged dollar_figure to operations the remaining balance of dollar_figure at date was due from the company’s majority shareholder and netted against other advances due to the shareholder during the remaining dollar_figure was determined to be uncollectible and charged to operations pkv s claimed a dollar_figure bad_debt deduction on its consolidated_income_tax_return for for the cash transfers that pk ventures tbpc and tptc had made to pkvi lp and for the cash transfer that pk ventures had made to rose in connection with the zephyr purchase with respect to this bad_debt deduction dollar_figure was attributable to the transfer that pk ventures had made to rose in connection with the zephyr purchase 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 b as described in the roses’ income_tax returns there were no amounts separately identified as interest payments made and or imputed by the roses to pk ventures on their joint income_tax returns for or on their joint income_tax return for the roses reported dollar_figure of cancellation_of_indebtedness_income the roses reported that dollar_figure of this amount was attributable to the transfer that pk ventures had made to rose in connection with the zephyr purchase c irs determinations the irs determined that pkv s was not allowed to claim bad_debt deductions of dollar_figure and dollar_figure on its consolidated income_tax returns for and 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 or accordingly the irs increased pkv s’s taxable_income by dollar_figure for and by dollar_figure for the irs determined that pk ventures’ transfer of dollar_figure to rose in connection with the zephyr purchase constituted a constructive_dividend to him in consequently the irs increased the roses’ taxable_income by dollar_figure for and determined that the roses should not have reported dollar_figure of cancellation_of_indebtedness_income on their joint income_tax return for 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 acquisition of these three hydroelectric projects was financed by the initial capital contributions that were made to pkvi lp during the years in issue the bulk of pkvi lp’s assets consisted of hydroelectric powerplant projects in north carolina and georgia pkvi lp’s debts to unrelated parties were generally nonrecourse in nature and were secured_by these hydroelectric properties as of date pkvi lp had loan agreements outstanding with first fidelity liberty life_insurance co liberty life and middle georgia fuel products inc mgfp as follows lender maturity_date first fidelity liberty life mgfp date date date interest rate dollar_figure dollar_figure outstanding principal balance as of dollar_figure big_number big_number as of that date the outstanding principal balances of the transfers associated with these agreements totaled dollar_figure of this dollar_figure dollar_figure was listed as a current_liability on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in less than year on the schedule l attached to pkvi lp’s form_1065 u s partnership return of income for the balance of this amount was listed as a long-term liability on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in year or more on the schedule l attached to pkvi lp’s form_1065 for as of date pkvi lp had loan agreements outstanding with first fidelity liberty life mgfp and trio manufacturing co trio as follows lender maturity_date first fidelity first fidelity liberty life mgfp trio date date date date date interest rate dollar_figure dollar_figure dollar_figure dollar_figure outstanding principal balance as of dollar_figure big_number big_number big_number big_number as of that date the outstanding principal balances of the transfers associated with these agreements totaled dollar_figure of this dollar_figure dollar_figure was listed as a current_liability on the balance_sheet included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in less than year on the schedule l attached to pkvi lp’s form_1065 for the balance of this amount was listed as a long-term liability on the balance_sheet included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in year or more on the schedule l attached to pkvi lp’s form_1065 for as of date pkvi lp had the following loan agreements outstanding lender maturity_date daley corp first fidelity first fidelity liberty life liberty life liberty life mgfp date date date date date date date interest rate -- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure outstanding principal balance as of dollar_figure big_number big_number big_number big_number big_number big_number as of that date the outstanding principal balances of the transfers associated with these agreements totaled dollar_figure of this dollar_figure dollar_figure was listed as a current_liability on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in less than year on the schedule l attached to pkvi lp’s form_1065 for the balance of this amount was listed as a long-term liability on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in year or more on the schedule l attached to pkvi lp’s form_1065 for as of date pkvi lp had the following loan agreements outstanding lender maturity_date interest rate outstanding principal balance as of first fidelity mgfp date date dollar_figure dollar_figure big_number pkvi lp entered into the dollar_figure loan agreement with first fidelity on or before date pkvi lp also had the same loan agreements outstanding with liberty life on date as it did on date the outstanding principal balances of pkvi lp’s loan agreements with liberty life totaled dollar_figure as of date dollar_figure of this amount was treated as long-term debt on pkvi lp’s audited financial statements for the year ended date and the balance was treated as a current_liability the outstanding principal balances of the transfers associated with the agreements described in the preceding two paragraphs totaled dollar_figure as of date of this amount dollar_figure was listed as a current_liability on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in less than year on the schedule l attached to pkvi lp’s form_1065 for the balance of this amount was listed as a long-term liability on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date and as mortgages notes and bonds payable in year or more on the schedule l attached to pkvi lp’s form_1065 for pkvi lp renegotiated its loan agreement with mgfp during the renegotiated loan agreement between pkvi lp and mgfp was for the principal balance of dollar_figure an amount that included the dollar_figure principal balance from their original loan agreement plus dollar_figure of accrued interest as of date pkvi lp had the following loan agreements outstanding lender maturity_date liberty life liberty life liberty life mgfp date date date date interest rate dollar_figure dollar_figure dollar_figure outstanding principal balance as of dollar_figure big_number big_number big_number as of that date the outstanding principal balances of the transfers associated with these agreements totaled dollar_figure on the balance_sheet included in pkvi lp’s audited financial statements for the year ended date pkvi lp’s current portion of long-term debt was listed as dollar_figure and its long-term debt due after one year was listed as dollar_figure on the schedule l attached to pkvi lp’s form_1065 for mortgages notes and bonds payable in less than year was listed as dollar_figure as of the end of that year and mortgages notes and bonds payable in year or more was listed as dollar_figure on date pkvi lp and liberty life agreed to consolidate their three outstanding loan agreements into one agreement the principal balance of this consolidated loan agreement was dollar_figure an amount that included the dollar_figure of outstanding principal balances from the three original loan agreements between pkvi lp and liberty life plus dollar_figure of accrued interest the interest rate for this consolidated loan agreement was dollar_figure percent ie the weighted average of the interest rates from the original loan agreements pkvi lp experienced difficulties with its georgia hydroelectric facilities city mills and juliette during as a result pkvi lp defaulted on the loan agreement it had entered with mgfp to finance the juliette facility as noted above pkvi lp and mgfp had renegotiated this loan agreement during in addition pkvi lp failed to make the required_payments of principal on its consolidated loan agreement with liberty life these payments were scheduled to begin on date as of date pkvi lp had the following loan agreements outstanding lender maturity_date interest rate outstanding principal balance as of liberty life mgfp date date dollar_figure dollar_figure big_number as of that date the outstanding principal balances of the transfers associated with these agreements totaled dollar_figure pkvi lp’s financial statements for the year ended date are not part of the record in these cases on the balance sheets included in pkvi lp’s reviewed financial statements for the year ended date pkvi lp’s total and current liabilities were listed as dollar_figure as of date the dollar_figure included dollar_figure for long-term debt in default dollar_figure for accrued expenses and dollar_figure for accounts_payable on the schedule l attached to pkvi lp’s form_1065 for dollar_figure was listed under mortgages notes and bonds payable in less than year as of the end of that year as of date pkvi lp had loan agreements outstanding with liberty life and mgfp as of that date the outstanding principal balances of the transfers associated with these agreements remained dollar_figure this entire amount was listed as a current_liability on the balance sheets included in pkvi lp’s reviewed financial statements for the year ended date on the schedule l attached to pkvi lp’s form_1065 for dollar_figure was listed under mortgages notes and bonds payable in less than year as of the end of that year and dollar_figure was listed under all nonrecourse loans as of date the loan agreement that pkvi lp had with liberty life remained outstanding as of that date the outstanding principal balance of this loan agreement remained dollar_figure this entire amount was listed as a current_liability on the balance sheets included in pkvi lp’s reviewed financial statements for the year ended date there was no schedule l attached to pkvi lp’s form_1065 for b transfers from pk ventures and or its subsidiaries to pkvi lp between and the end of pk ventures tbpc and tptc made cash transfers to pkvi lp on pk ventures’ general ledger these transfers were treated as loans rose executed one-page documents entitled promissory note pkvi lp promissory note with respect to some but not all of these transfers the terms of the pkvi lp promissory notes required that the transfers be repaid on demand with an interest rate of either dollar_figure or percent payment of interest was due only with the payment of principal and payment of principal was not to be made if payment to pk ventures would have caused pkvi lp to default or breach any other note or agreement to which pkvi lp was a party this last provision subordinated pk ventures’ right to demand payment of the transfers to the rights of pkvi lp’s creditors unlike the basic structure of pkvi lp’s debt to unrelated parties the pkvi lp promissory notes were not secured_by the hydroelectric properties owned by pkvi lp the pkvi lp promissory notes were signed by rose alone they were neither attested to by a witness nor notarized on date rose executed a pkvi lp promissory note in favor of pk ventures in which pkvi lp promised to pay pk ventures the principal_amount of dollar_figure dollar_figure promissory note the dollar_figure promissory note reflected the aggregate amount of cash that had been transferred from pk ventures tbpc and tptc to pkvi lp from through pk ventures tbpc and tptc made cash transfers to pkvi lp totaling dollar_figure during on date rose executed a pkvi lp promissory note in favor of pk ventures in which pkvi lp promised to pay pk ventures the principal_amount of dollar_figure dollar_figure promissory note the dollar_figure promissory note reflected the aggregate amount of cash that had been transferred from pk ventures tbpc and tptc to pkvi lp from through pk ventures tbpc and tptc made transfers to pkvi lp totaling dollar_figure during on date rose executed a pkvi lp promissory note in favor of pk ventures in which pkvi lp promised to pay pk ventures the principal_amount of dollar_figure dollar_figure promissory note the dollar_figure promissory note reflected the aggregate amount of cash that had been transferred from pk ventures tbpc and tptc to pkvi lp from through at the time that rose signed the dollar_figure promissory note he did not intend to have pkvi lp repay any of this amount to pk ventures in addition rose as a general_partner with a 70-percent interest in pkvi lp did not intend to repay any of this amount to pk ventures at the time that he signed the dollar_figure promissory note no legal action was taken by pk ventures against rose to force repayment of the dollar_figure promissory note rose owned approximately percent of the stock of pk ventures during in a letter dated date to douglas w kroske c f a senior vice president of liberty capital advisors inc rose made the following statements concerning the transfers from pk ventures tbpc and tptc to pkvi lp since pk ventures inc has invested over dollar_figure million in these hydroelectric projects and is willing to continue but needs some help from liberty life there has been a delay on the financial statements for the year ending during the year based on ernst young’s review dollar_figure cash was provided to the partnership from pk ventures inc since inception to a total amount of dollar_figure has been injected and our auditors are now going to make pk ventures inc write this off as it is an uncollectible claim against the partnership the dollar_figure cash of was used approximately for equipment and bynum canal repairs of dollar_figure and the balance used in payments to liberty life as described in the business’s financial statements and income_tax returns a no direct references were made and no explanations were provided in pkvi lp’s audited financial statements for the year ended date as to the amounts that pkvi lp received from pk ventures during that year on pk ventures’ schedule_k-1 partner’s share of income credits deductions etc attached to pkvi lp’s form_1065 for pk ventures was reported to have made a dollar_figure capital_contribution to pkvi lp during that year and to have a capital_account with a balance of dollar_figure as of the end of that year no other direct references were made and no other explanations were provided in pkvi lp’s form_1065 for as to the amounts that pkvi lp received from pk ventures during that year there were also no amounts separately identified as interest payments made and or imputed by pkvi lp to pk ventures on its form_1065 for on the statement of financial condition included in pk ventures’ audited financial statements for the year ended date a dollar_figure investment in affiliated partnership was listed as an asset this entry referred to pk ventures’ investment in pkvi lp the dollar_figure was listed under other investments on the schedule l attached to pk ventures’ income_tax return for no other direct references were made and no other explanations were provided in pk ventures’ financial statements for as to the amounts that it transferred to pkvi lp during that year no direct references were made and no explanations were provided in pk ventures’ income_tax return for as to the amounts that it transferred to pkvi lp during that year there were no amounts separately identified as interest payments received and or imputed by pk ventures from pkvi lp on pk ventures’ income_tax return for b no direct references were made and no explanations were provided in pkvi lp’s financial statements for as to the amounts that pkvi lp received from pk ventures tbpc or tptc during that year on the balance_sheet included in pkvi lp’s audited financial statements for the year ended date dollar_figure due to affiliated company was listed as a current_liability no direct references were made and no explanations were provided in pkvi lp’s form_1065 for as to the amounts that pkvi lp received from pk ventures tbpc or tptc during that year on the schedule l attached to pkvi lp’s form_1065 for dollar_figure was listed under other liabilities as of the end of that year there were no amounts separately identified as interest payments made and or imputed by pkvi lp to pk ventures tbpc or tptc on its form_1065 for no direct references were made and no explanations were provided in pk ventures tbpc or tptc’s financial statements for the year ended date as to the amounts that pk ventures tbpc and tptc transferred to pkvi lp during that year no direct references were made and no explanations were provided in pkv s’s consolidated_income_tax_return for as to the amounts that pk ventures tbpc and tptc transferred to pkvi lp during that year there were no amounts separately identified as interest payments received and or imputed by pk ventures tbpc or tptc from pkvi lp on pkv s’s consolidated_income_tax_return for c note to pkvi lp’s audited financial statements for the year ended date stated in pertinent part at date the partnership owed dollar_figure to p k ventures inc and dollar_figure to affiliated entities which are respectively owned by the partnerships’ general partners on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date dollar_figure due to affiliated company was listed as a current_liability on the schedule l attached to pkvi lp’s form_1065 for dollar_figure due to affiliated company was listed under other current liabilities as of the end of that year there were no amounts separately identified as interest payments made and or imputed by pkvi lp to pk ventures tbpc or tptc on its form_1065 for no direct references were made and no explanations were provided in pk ventures tbpc or tptc’s financial statements for the year ended date as to the amounts that pk ventures tbpc and tptc transferred to pkvi lp during that year on the schedule l attached to pkv s’s consolidated_income_tax_return for pk ventures tbpc and tptc reported dollar_figure due from pkvi lp under other assets as of the end of that year of this amount dollar_figure was attributable to pk ventures dollar_figure was attributable to tbpc and dollar_figure was attributable to tptc there were no amounts separately identified as interest payments received and or imputed by pk ventures tbpc or tptc from pkvi lp on pkv s’s consolidated_income_tax_return for d note to pkvi lp’s audited financial statements for the year ended date stated in pertinent part at date the partnership owed dollar_figure to p k ventures inc and dollar_figure to companies affiliated with p k ventures inc on the statement of financial condition included in pkvi lp’s audited financial statements for the year ended date dollar_figure due to affiliated company was listed as a liability no direct references were made and no explanations were provided in pkvi lp’s form_1065 for as to the amounts that pkvi lp received from pk ventures tbpc or tptc during that year on the schedule l attached to pkvi lp’s form_1065 for dollar_figure due to affiliated company was listed under other current liabilities as of the end of that year there were no amounts separately identified as interest payments made and or imputed by pkvi lp to pk ventures tbpc or tptc on its form_1065 for no direct references were made and no explanations were provided in pk ventures tbpc or tptc’s financial statements for the year ended date as to the amounts that pk ventures tbpc and tptc transferred to pkvi lp during that year on the schedule l attached to pkv s’s consolidated_income_tax_return for pk ventures and its subsidiaries reported dollar_figure due from pkvi lp under other assets as of the end of that year there were no amounts separately identified as interest payments received and or imputed by pk ventures tbpc or tptc from pkvi lp on pkv s’s consolidated_income_tax_return for e contrary to the terms of the pkvi lp promissory notes note d to pkvi lp’s audited financial statements for the year ended date stated that the transfers that had been received by pkvi lp from pk ventures totaling dollar_figure did not bear interest note d also stated that there was no stated maturity_date with respect to these transfers and that pkvi lp anticipated that it would repay pk ventures when cash was available on the balance sheets included in these financial statements dollar_figure due to affiliated company was listed as a liability on the schedule l attached to pkvi lp’s form_1065 for dollar_figure due to affiliated companies was listed under other liabilities as of the end of that year on its form_1065 for pkvi lp reported imputed_interest payments totaling dollar_figure there were no amounts separately identified as interest payments made and or imputed by pkvi lp to pk ventures tbpc or tptc on its form_1065 for note c to the audited consolidated financial statements of pkv s for the year ended date stated the following the company has a receivable of dollar_figure from pk ventures i limited_partnership ltd in which it has a general_partnership interest and a limited_partnership_interest the company’s investment in and advances to ltd have been reduced by dollar_figure under the equity method_of_accounting at date ltd has a deficit of dollar_figure and incurred a net_loss of dollar_figure in the management of ltd is completing construction of certain operating facilities and believes that ltd will become profitable in the future and be able to repay the advances from the company the collectibility of the receivable is dependent upon future events which cannot be predicted at this time on the consolidated balance sheets included in these financial statements dollar_figure for investment in and advances to limited_partnerships was listed as an asset of the dollar_figure dollar_figure was attributable to an amount due from limited_partnership for pk ventures and dollar_figure was attributable to an investment in limited_partnerships by tpc on the consolidated statements of cash flows included in these financial statements dollar_figure for advances to limited_partnership was listed under investing activities on the schedule l attached to pkv s’s consolidated_income_tax_return for pk ventures reported dollar_figure due from pkvi lp under other current_assets as of the end of that year on its consolidated_income_tax_return for pkv s reported that pk ventures had imputed_interest payments from pkvi lp under sec_7872 totaling dollar_figure f pkvi lp’s financial statements for the year ended date are not part of the record in these cases on the schedule l attached to pkvi lp’s form_1065 for no amount due to affiliated companies was listed under other liabilities as of the end of that year on its form_1065 for pkvi lp reported imputed_interest payments totaling dollar_figure there were no amounts separately identified as interest payments made and or imputed by pkvi lp to pk ventures tbpc or tptc on its form_1065 for pkv s claimed a bad_debt expense of dollar_figure on its audited consolidated financial statements for the year ended date of this amount dollar_figure was attributable to the transfers that pk ventures had made to pkvi lp in and prior years note to these financial statements offered the following explanation for pkv s’ claiming a bad_debt expense with respect to these transfers at date the company had made dollar_figure of noninterest-bearing advances to pk ventures i limited_partnership ltd in which it has a general_partnership interest and a limited_partnership_interest the company made additional advances to ltd in of dollar_figure principally to fund operating losses management of the company believes that recovery_of its advances to and investment in ltd is unlikely and accordingly has forgiven advances amounting to dollar_figure in and charged bad_debts expense the company also recorded losses under the equity method of dollar_figure in and dollar_figure in pkv s claimed a dollar_figure bad_debt deduction on its consolidated_income_tax_return for for the cash transfers that pk ventures tbpc and tptc had made to pkvi lp and for the cash transfer that pk ventures had made to rose in connection with the zephyr purchase with respect to this bad_debt deduction pkv s reported that dollar_figure was attributable to the dollar_figure promissory note’s being uncollectible on its consolidated_income_tax_return for pkv s reported that pk ventures had imputed_interest payments from pkvi lp under sec_7872 totaling dollar_figure g the reviewed financial statements of pkvi lp for the year ended date indicate that pk ventures as pkvi lp’s sole limited_partner continued to transfer funds to pkvi lp during note to these financial statements stated the following at date the general_partner p k ventures inc forgave advances totaling dollar_figure at date the partnership owed the limited_partner dollar_figure in the form of demand notes pincite interest these notes cannot be repaid if such payment causes defaults with regard to other debt agreements interest of dollar_figure was incurred but not paid during related to these notes on the balance sheets included in these financial statements dollar_figure for notes payable to limited_partner was listed as a current_liability on the consolidated statements of cash flows included in pkv s’s audited consolidated financial statements for the year ended date there was no amount listed for advances to limited_partnership under the investing activities section note due from limited_partnership to these financial statements does not mention that any transfers had been made from pk ventures to pkvi lp during h pkvi lp’s reviewed financial statements for the year ended date indicate that pkvi lp received transfers from pk ventures totaling dollar_figure during note to pkvi lp’s reviewed financial statements for the year ended date stated at date the partnership owed one limited_partner dollar_figure in the form of demand notes at interest rates ranging from to interest of dollar_figure and dollar_figure was incurred but not paid during and respectively on the balance sheets included in these financial statements dollar_figure for notes payable to limited_partner was listed as a current_liability on the consolidating balance_sheet included in pkv s’s audited consolidated financial statements for the year ended date there were no amounts listed as due from affiliated partnership or as investments in limited_partnerships with respect to pk ventures irs determinations the irs determined that pkv s should not have imputed dollar_figure of interest_income from pkvi lp on its consolidated_income_tax_return for or dollar_figure of interest_income from pkvi lp on its consolidated_income_tax_return for because the cash transfers that pk ventures had made to pkvi lp were contributions to capital instead of loans accordingly the irs decreased pkv s’s interest_income by dollar_figure for and by dollar_figure for the irs also determined that pkv s was not allowed to claim a bad_debt deduction of dollar_figure on its consolidated_income_tax_return for for cash transfers that pk ventures and or its subsidiaries had made to pkvi lp because these transfers were contributions to capital instead of loans alternatively the irs determined that if these transfers were not contributions to capital they were made for the benefit of the partners of pkvi lp and thus were distributions to the partners as a further alternative the irs determined that if these transfers were bona_fide loans the bad_debt deduction should not be allowed because pkv s had not established that the debt had become worthless during accordingly the irs increased pkv s’s taxable_income by dollar_figure for the irs determined that pkvi lp should not have imputed dollar_figure of interest_expense to pk ventures on its form_1065 for because it had not been established that the interest_expense was attributable to a bona_fide debt rather the irs determined that the funds that had been transferred from pk ventures and or its subsidiaries to pkvi lp were capital contributions accordingly the irs increased pkvi lp’s ordinary_income by dollar_figure for the irs determined that the cash transfers that had been made by pk ventures and or its subsidiaries to pkvi lp were made on behalf of the roses and that the transfers constituted constructive dividends to them after making certain concessions the irs determined that the roses should have reported a constructive_dividend of dollar_figure on their joint income_tax return for and a constructive_dividend of dollar_figure on their joint income_tax return for accordingly the irs increased the roses’ taxable_income by dollar_figure for and by dollar_figure for the irs notified the roses that with respect to pkvi lp was subject_to partnership-level proceedings pursuant to the partnership audit and litigation procedures of sec_6221 through consequently the irs removed the amount that the roses had reported as their distributive_share of pkvi lp’s cancellation_of_indebtedness_income from their income for that year the irs made these adjustments pursuant to 92_tc_71 other circumstances surrounding pk ventures’ operations and financial arrangements a going concern notes in the business’s financial statement sec_1 pk ventures slpc tbpc and tptc note to pk ventures’ audited financial statements for the year ended date set forth the going concern position of the corporation note stated in pertinent part the following with respect to the corporation’s financial status management’s plans include several steps which may mitigate the current adverse financial condition the company’s management extended payment terms related to certain accrued payables such as officer’s salaries indefinitely subject_to cash availability the notes to slpc tbpc and tptc’s audited financial statements for the year ended date also include going concern notes that state that each corporation’s management had extended payment terms related to certain accrued payables such as officer’s salary indefinitely subject_to cash availability no corporate resolutions and or other agreements by pk ventures slpc tbpc or tptc set forth the terms of these extended payment arrangements pkvi lp note to pkvi lp’s audited financial statements for the year ended date set forth the going concern position of the partnership note stated the following with respect to the partnership’s financial status management’s plans include several steps which may mitigate the current adverse financial condition these steps include renegotiation and reduction of short term debt and reduction of certain operating costs note e to pkvi lp’s audited financial statements for the year ended date set forth the going concern position of the partnership note e stated in pertinent part the following with respect to the partnership’s financial status the partnership’s financial statements have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business at date partners’ capital is in a deficit position of dollar_figure management plans to mitigate the current adverse financial position by restoring one of its plants to operating condition during and completing construction projects on two hydroelectric plants which are not yet operational to generate revenues in addition p k ventures inc the general and a limited_partner will continue to advance cash to the partnership as needed note to pkvi lp’s reviewed financial statements for the year ended date set forth the going concern position of the partnership note stated in pertinent part the following with respect to the partnership’s financial status the partnership’s financial statements have been presented on a going-concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business cash_flow deficits and capital needs were supplied and funded in by p k ventures inc in cash_flow deficits and capital needs were funded by a loan from the limited_partner management is exploring the possibility of renegotiating higher rates on the sales of power and intends to maintain tight expense control at all three of its operational plants the partnership may be able to obtain additional funding from the limited_partner management is also exploring a possible reorganization or merger the outcome of these matters cannot be predicted at this time note to pkvi lp’s reviewed financial statements for the year ended date set forth the going concern position of the partnership note stated in pertinent part the following with respect to the partnership’s financial status the partnership’s financial statements have been presented on a going-concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business cash_flow deficits and capital needs were funded in and by loans from the limited_partner management is also exploring a possible reorganization or merger the outcome of these matters cannot be predicted at this time b litigation involving slpc tbpc and tptc a majority of pk ventures’ income was generated by the operations of its pipeline subsidiaries ie slpc tbpc tpc and tptc pk ventures’ largest investments were in tbpc and tptc as of date slpc tbpc and tptc were all litigating separate matters the matters being litigated affected the corporations’ revenue streams in particular tbpc did not receive any of the dollar_figure of lease payments that it was owed by royster between date and date in addition slpc’s pipeline was taken out of service sometime prior to date for environmental reasons there were no direct references made to this litigation in pkv s’s audited consolidated financial statements for the year ended date note of these financial statements however stated in pertinent part that the company has not repaid dollar_figure of subordinated notes payable to the former shareholders of its subsidiaries pending the resolution of various claims against the former shareholders c transfers from rose to pk ventures as of the beginning of date pk ventures owed dollar_figure million to the tptc sellers this amount was to have been paid_by date this debt was settled in date when pk ventures agreed to pay the tptc sellers dollar_figure rose transferred the dollar_figure to pk ventures in date so that it could pay the tptc sellers pk ventures was relieved of the remaining balance of this dollar_figure million debt in sum rose made cash transfers to pk ventures totaling dollar_figure during of this dollar_figure rose transferred dollar_figure during the last quarter of pk ventures executed documents that were identical to the pkvi lp promissory notes described above in favor of rose with respect to these transfers these documents were signed by rose alone they were neither attested to by a witness nor notarized during rose made cash transfers to pk ventures and its subsidiaries totaling dollar_figure note to pkv s’s audited consolidated financial statements for the year ended date stated the following with respect to these transfers notes payable to shareholder represent cash advances contributed to the company by the major shareholder for operations the notes bear interest pincite and are due on demand the shareholder advanced dollar_figure and dollar_figure to the company during and respectively interest_expense on notes payable to shareholder was dollar_figure and dollar_figure during and respectively rose’s wages for through the following table breaks down the percentage of time that rose devoted to his duties for printon kane and or the printon kane group pk ventures and its subsidiaries pkvi lp and zephyr during through printon kane printon kane group pk ventures and subsidiaries pkvi lp zephyr -- -- -- -- -- -- -- -- year during these years rose routinely worked long hours and rarely took vacations pk ventures reported the following amounts from its operations on its income_tax return for and pkv s reported the following amounts from its operations on its consolidated income_tax returns for through year gross_receipts or sales gross_profit total income loss net_income loss -- dollar_figure big_number big_number big_number big_number big_number big_number -- dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number pkvi lp reported the following amounts from its operations on its forms for through gross_receipts or sales gross_profit total income loss ordinary_income loss from business activities dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number year zephyr reported the following amounts from its operations on its forms 1120s for through gross_receipts or sales gross_profit total income loss ordinary_income loss from business activities dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number year in addition to the wages discussed below pk ventures provided health insurance to rose and his family during the years in issue sometime in pk ventures purchased a honda civic and provided that car to rose pk ventures replaced the honda civic with a mercedes benz in and provided the mercedes benz to rose throughout that year and the remaining years in issue rose determined that pk ventures would not provide him with any retirement benefits a wages received from printon kane and the printon kane group rose’s salaries from printon kane during and were dollar_figure dollar_figure and dollar_figure respectively in rose received salaries from printon kane and the printon kane group totaling dollar_figure and dollar_figure respectively in rose received a salary from the printon kane group totaling dollar_figure rose did not receive any compensation from either printon kane or the printon kane group after b wages recorded on pk ventures’ books_and_records pk ventures’ general ledger for indicated that during pk ventures paid rose compensation totaling dollar_figure pk ventures’ general ledger for also indicated that of this dollar_figure pk ventures had accrued dollar_figure prior to and that slpc tbpc and tptc had accrued the balance prior to and during in the following proportions total compensation accrued portion attributable to slpc tbpc tptc dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number -- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number year total as of date pk ventures’ books indicated that during pk ventures had accrued dollar_figure of salary and an additional dollar_figure of compensation benefits with respect to rose that tbpc had accrued dollar_figure of compensation benefits with respect to rose and that tptc had accrued dollar_figure of mgt salaries with respect to rose during date rose made journal entries to pk ventures’ general ledger to reflect deferred_compensation payable to him for through in the following amounts year amount dollar_figure big_number big_number big_number big_number big_number according to this deferred_compensation account pk ventures owed rose dollar_figure as of date prior to rose’s making these journal entries there had never been a written_agreement between rose and pk ventures as to deferred_compensation and rose had never discussed deferred_compensation with anyone who had an equity_interest or financial interest in pk ventures pk ventures’ general ledger for indicated that during pk ventures paid rose dollar_figure for and dollar_figure for as of date the deferred_compensation account included in pk ventures’ general ledger showed a current balance of dollar_figure at the advice of the auditors of pkv s’s consolidated financial statements this balance was reversed off of pk ventures’ general ledger consequently there was no liability for deferred_compensation reported on pkv s’s audited consolidated financial statements for the year ended date or on pkv s’s audited consolidated financial statements for the year ended date moreover there was no liability for deferred_compensation reported on the schedules l attached to pkv s’s consolidated income_tax returns for and pk ventures’ general ledger for also indicated that during pk ventures paid rose dollar_figure for his services to it and its subsidiaries of this dollar_figure dollar_figure was attributable to mgt sal tptc and dollar_figure was attributable to mgt sal tbpc pk ventures’ general ledger for indicated that during pk ventures paid rose compensation totaling dollar_figure the general ledger did not clearly indicate what portion of this dollar_figure was attributable to current compensation and what part if any was attributable to deferred_compensation rose as sole director of pk ventures determined the amounts of compensation that pk ventures paid to him during the years in issue with respect to the dollar_figure of deferred_compensation that was recorded in pk ventures’ general ledger for rose first determined this amount sometime between the beginning of and date included in the determination of the dollar_figure was the amount of compensation that rose believed that he should have received from zephyr during a 16-month period in and there had never been an amount accrued as a salary for rose on zephyr’s books_and_records and pk ventures had never been a shareholder of zephyr furthermore the total compensation that rose determined that pk ventures should pay him for and related to his providing services over an 3-year period that included a portion of and the entirety of through c wages reported on income_tax returns pk ventures deducted the following amounts as compensation paid to officers and salaries and wages paid on its income_tax return for and pkv s deducted the following amounts as compensation paid to officers and salaries and wages paid on its consolidated income_tax returns for through compensation paid to officers salaries and wages paid -- -- -- dollar_figure big_number big_number big_number big_number -- dollar_figure big_number -- big_number big_number big_number big_number year all of the amounts that pkv s reported as compensation paid to officers on these returns were attributable to rose on the roses’ joint income_tax returns for through rose reported that he received the following amounts of compensation wages and salaries gross_income reported on schedule c miscellaneous income from form_1099 dollar_figure -- -- -- big_number big_number dollar_figure -- -- -- -- -- -- dollar_figure big_number big_number -- -- year rose did not report any compensation from pk ventures or its subsidiaries in or on its consolidated_income_tax_return for pkv s claimed a dollar_figure deduction for officer compensation paid to rose and a dollar_figure deduction for a salary transfer to tampa bay pipeline co from pk ventures pkv s reported that dollar_figure of the dollar_figure was paid_by tptc and that the balance was paid_by pk ventures neither the dollar_figure attributable to tbpc nor the dollar_figure attributable to pk ventures and tptc appears on the roses’ joint income_tax return for as wages received rose did however report dollar_figure of imputed_interest from pk ventures on that return as well as dollar_figure of gross_income from his involvement in an investment_company on a schedule c profit or loss from business that was attached to the return on its consolidated_income_tax_return for pkv s claimed a dollar_figure deduction for officer compensation paid to rose pkv s reported that dollar_figure of this amount was paid_by tbpc that dollar_figure was paid_by tptc and that the balance was paid_by pk ventures in addition pkv s claimed a dollar_figure deduction for other salaries and wages paid to rose this latter deduction was attributable to the reclassification of an account showing that rose owed pk ventures dollar_figure as of date as discussed above this reclassification resulted in pkv s’s claiming a dollar_figure bad_debt deduction as well as the dollar_figure deduction for other salaries and wages paid to rose the roses reported the dollar_figure of officer compensation on their joint income_tax return for but they failed to report the dollar_figure of other salaries and wages on its consolidated_income_tax_return for pkv s claimed a dollar_figure deduction for officer compensation paid to rose pkv s reported that dollar_figure of this amount was paid_by tbpc that dollar_figure was paid_by tptc and that the balance was paid_by pk ventures the roses reported the dollar_figure of officer compensation on their joint income_tax return for on its consolidated_income_tax_return for pkv s claimed a dollar_figure deduction for officer compensation paid to rose pkv s reported that dollar_figure of this amount was paid_by tbpc that dollar_figure was paid_by tptc and that the balance was paid_by pk ventures the roses reported the dollar_figure of officer compensation on their joint income_tax return for in addition to this amount the roses reported interest from pk ventures of dollar_figure rose received the amounts of wages and salaries that he reported on the roses’ joint income_tax returns for and from tpc tpc issued forms w-2 wage and tax statement to rose with respect to these amounts d irs determinations with respect to the irs determined that rose should have reported a total of dollar_figure of compensation from pk ventures and its subsidiaries the irs determined that this amount included dollar_figure of compensation that had been accrued by slpc tbpc and tptc during and and paid to rose in and included dollar_figure of compensation that had been accrued by pk ventures prior to and paid to rose in after taking into account the dollar_figure of gross_income that rose had reported on a schedule c that was attached to the roses’ joint income_tax return for and shifting dollar_figure of the compensation that rose reported in to the irs increased the roses’ taxable_income for by dollar_figure with respect to the irs determined that rose should have reported an additional dollar_figure of compensation from pk ventures and its subsidiaries the irs determined that this amount included dollar_figure of compensation that had been accrued by tbpc and tptc during and included dollar_figure of compensation that had been accrued by pk ventures during that year accordingly the irs increased the roses’ taxable_income for by dollar_figure the roses conceded these adjustments for and taking into account these concessions rose received the following amounts of compensation_for his services to pk ventures and its subsidiaries during through entity pk ventures dollar_figure slpc tbpc tptc -- total big_number -- -- dollar_figure big_number big_number big_number big_number dollar_figure -- big_number big_number big_number in sum rose received dollar_figure for his services to pk ventures and its subsidiaries during these years with respect to the irs determined that the deduction that pkv s claimed for compensation paid to rose should be reduced by dollar_figure the irs determined this reduction by subtracting reasonable salary for totaling dollar_figure and deferred_compensation totaling dollar_figure from the dollar_figure that pkv s deducted in that year the irs determined the reasonable salary for by multiplying pkv s’s gross_receipts for that year by percent the irs determined deferred_compensation as follows salary deducted on return reasonable salary difference deferred_compensation -- -- dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number year total as it did in the irs determined reasonable salary for through by multiplying pkv s’s gross_receipts for each of those years by percent accordingly the irs increased pkv s’s taxable_income by dollar_figure for with respect to the irs determined that the deduction that pkv s claimed for compensation paid to rose should be reduced by dollar_figure the irs determined this reduction by subtracting reasonable salary for totaling dollar_figure from the officer compensation that pkv s deducted in that year as it did in the irs determined reasonable salary for by multiplying pkv s’s gross_receipts for that year by percent accordingly the irs increased pkv s’s taxable_income by dollar_figure for pk ventures’ share of pkvi lp’s items of income and loss a as reported on pk ventures’ schedules k-1 the following items were listed on pk ventures’ schedules k-1 that were attached to pkvi lp’s forms for through year item amount general interest limited interest capital contributed during year dollar_figure net_long-term_capital_gain withdrawals and distributions -- ordinary_loss from business activities big_number net_short-term_capital_loss capital contributed during year -- interest_income withdrawals and distributions -- ordinary_loss from business activities big_number capital contributed during year big_number withdrawals and distributions -- ordinary_loss from business activities big_number capital contributed during year -- withdrawals and distributions -- ordinary_loss from business activities big_number -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- capital contributed during year -- dollar_figure big_number net gain under sec_1231 withdrawals and distributions -- -- ordinary_loss from business activities big_number big_number capital contributed during year -- big_number big_number cancellation_of_indebtedness_income withdrawals and distributions -- ordinary_loss from business activities big_number big_number -- -- capital contributed during year -- withdrawals and distributions -- ordinary_loss from business activities big_number big_number -- -- capital contributed during year -- withdrawals and distributions -- ordinary_loss from business activities big_number big_number net_loss under sec_1231 big_number big_number -- -- b as reported on the income_tax returns for pk ventures and pkv s pk ventures reported the following amount with respect to its interest in pkvi lp on its income_tax return for and pkv s reported the following amounts with respect to pk ventures’ and or its subsidiaries’ interests in pkvi lp on its consolidated income_tax returns for through income loss from pkvi lp bad_debts cancellation_of_indebtedness_income -- dollar_figure -- big_number -- big_number -- big_number big_number -- big_number dollar_figure -- big_number big_number -- -- -- -- -- -- -- -- dollar_figure year c irs determinations the irs determined that pkv s could deduct pk ventures’ distributive_share of pkvi lp’s losses for and to the extent of pk ventures’ basis in its pkvi lp interest before taking into account any of pkvi lp’s losses the irs determined that pk ventures’ basis in its pkvi lp interest was dollar_figure as of date the irs determined this amount by subtracting the amount of pkvi lp’s losses that pkv s deducted in and from the cash advances that it determined that pk ventures had made to pkvi lp in and prior years and the capital_contribution that it determined that pk ventures had made to pkvi lp in the irs allowed as a deduction against this basis dollar_figure of pk ventures’ distributive_share of pkvi lp’s losses for accordingly the irs increased pkv s’s taxable_income by dollar_figure for before taking into account any of pkvi lp’s losses the irs determined that pk ventures’ basis in its pkvi lp interest was zero as of date with respect to the irs notified pkv s that pkvi lp was subject_to partnership-level proceedings pursuant to the partnership audit and litigation procedures of sec_6221 through consequently the irs removed the amounts that pkv s had reported as pk ventures’ distributive shares of pkvi lp’s loss and cancellation_of_indebtedness_income from pkv s’s taxable_income for that year the irs made these adjustments pursuant to 92_tc_71 pkv s’s taxable_income for was not affected as a result of these adjustments before taking into account any of pkvi lp’s losses the irs determined that pk ventures’ basis in its pkvi lp interest was zero as of date and zero as of date consequently the irs did not allow pkv s to deduct any of pkvi lp’s losses during those years the irs increased pkv s’s taxable_income by dollar_figure for and by dollar_figure for the roses’ share of pkvi lp’s items of income and loss a as reported on rose’s schedules k-1 the following items were listed on rose’s schedules k-1 that were attached to pkvi lp’s forms for through year item capital contributed during year net_long-term_capital_gain withdrawals and distributions ordinary_loss from business activities net_short-term_capital_loss capital contributed during year interest_income withdrawals and distributions ordinary_loss from business activities capital contributed during year withdrawals and distributions ordinary_loss from business activities capital contributed during year withdrawals and distributions ordinary_loss from business activities capital contributed during year net gain under sec_1231 withdrawals and distributions ordinary_loss from business activities amount -- dollar_figure -- big_number -- big_number -- big_number -- -- big_number big_number -- big_number -- big_number -- big_number capital contributed during year cancellation_of_indebtedness_income withdrawals and distributions ordinary_loss from business activities -- big_number -- big_number capital contributed during year withdrawals and distributions ordinary_loss from business activities capital contributed during year withdrawals and distributions ordinary_loss from business activities net_loss under sec_1231 -- -- big_number -- -- big_number big_number b as reported on the roses’ income_tax returns on their joint income_tax returns for through the roses reported the following amounts of income and loss with respect to their interest in pkvi lp year income loss from pkvi lp cancellation_of_indebtedness_income -- dollar_figure big_number big_number big_number big_number dollar_figure -- -- -- -- -- the roses attached the following statement in pertinent part to their joint income_tax return for the above mentioned taxpayers have elected to carryforward the net operating lossess sic of the following companies for the tax period ending pk ventures i limited_partnership the aggregate amount of dollar_figure which appears on the taxpayer’s schedule_k-1 form_1065 line in addition unused outstanding amounts have been carried forward pk ventures i limited_partnership of dollar_figure and pk ventures i limited_partnership of dollar_figure this statement was signed by the roses and dated date in sum the roses carried forward losses from pkvi lp totaling dollar_figure the roses attached the following statement in pertinent part to their joint income_tax return for the above mentioned taxpayers have elected to carryforward the net operating lossess sic of the following companies for the tax period ending the amount of dollar_figure of unapplied net_operating_loss from pk ventures i lp was carried forward to of this amount dollar_figure was applied in schedule e2 line 31h and the balance of dollar_figure carried forward the amount of dollar_figure unapplied net_operating_loss from pk ventures lp has been carried forward this statement was signed by the roses and dated date in sum the roses carried forward losses from pkvi lp totaling dollar_figure the roses attached the following statement to their joint income_tax return for the above mentioned taxpayers have elected to apply the net operating losses of the following company for the tax period ending the amount of dollar_figure of net operating losses from pk ventures i limited_partnership have been applied the taxpayer has elected to carryforward the balance of dollar_figure of unapplied net operating losses the amount of dollar_figure of net operating losses from pk ventures i limited_partnership have been applied the amount of dollar_figure of net operating losses from pk ventures i limited_partnership have been applied in sum the roses carried forward losses from pkvi lp totaling dollar_figure the roses attached the following statement in pertinent part to their joint income_tax return for the above mentioned taxpayers have elected to apply the net_operating_loss carryforward for the tax period ending for the amount of dollar_figure from pk ventures i limited_partnership c irs determinations the irs determined that the roses could deduct their distributive_share of pkvi lp’s losses for and to the extent of the basis in their pkvi lp interest before taking into account any of pkvi lp’s losses the irs determined that the roses’ basis in their pkvi lp interest was dollar_figure as of date the irs determined this amount by subtracting the amount of pkvi lp’s losses that the roses deducted in and from the amount of constructive dividends that it determined that the roses recognized as a result of the transfers from pk ventures tbpc and tptc to pkvi lp prior to the irs included a note stating that this basis computation will need to be adjusted if the level of constructive dividends shown in adjustment h are sic changed the irs allowed as a deduction against this basis a dollar_figure loss carryover from pkvi lp’s partnership year a dollar_figure loss carryover from pkvi lp’s partnership year and dollar_figure of the roses’ distributive_share of pkvi lp’s losses for accordingly the irs decreased the roses’ taxable_income by dollar_figure for before taking into account any of pkvi lp’s losses the irs determined that the roses’ basis in their pkvi lp interest was dollar_figure as of date the irs determined that the roses recognized this amount of constructive dividends as a result of the transfers from pk ventures tbpc and tptc to pkvi lp during the irs included a note stating that this basis computation will need to be adjusted if the level of constructive dividends shown in adjustment h are sic changed as discussed above the irs notified the roses that pkvi lp was subject_to partnership-level proceedings pursuant to the partnership audit and litigation procedures of sec_6221 through with respect to consequently the irs removed the amounts that had been reported as the roses’ distributive_share of pkvi lp’s losses and cancellation_of_indebtedness_income from the roses’ taxable_income for after making these adjustments the irs determined that the roses could deduct the balance of their distributive_share of pkvi lp’s losses for dollar_figure because the balance of the roses’ distributive_share of pkvi lp’s losses for was dollar_figure less than the amount of pkvi lp’s losses that the roses claimed on their joint income_tax return for after removal of the roses’ distributive_share of pkvi lp’s losses for from that amount the irs increased the roses’ taxable_income by dollar_figure for before taking into account any of pkvi lp’s losses the irs determined that the roses’ basis in their pkvi lp interest was dollar_figure as of date the irs determined that this amount had been advanced to pkvi lp on behalf of the roses during the irs allowed as a deduction against this basis dollar_figure of the roses’ distributive_share of pkvi lp’s losses for accordingly the irs increased the roses’ taxable_income by dollar_figure for before taking into account any of pkvi lp’s losses the irs determined that the roses’ basis in their pkvi lp interest was dollar_figure as of date the irs determined that this amount had been advanced to pkvi lp on behalf of the roses during the irs allowed as a deduction against this basis dollar_figure of the roses’ balance of their distributive_share of pkvi lp’s losses for accordingly the irs increased the roses’ taxable_income by dollar_figure for before taking into account any of pkvi lp’s losses the irs determined that the roses’ basis in their pkvi lp interest was zero as of date and zero as of date consequently the irs did not allow the roses to deduct any of pkvi lp’s losses during those years the irs increased the roses’ taxable_income by dollar_figure for and dollar_figure for the roses’ share of zephyr’s items of income and loss a as reported on rose’s schedules k-1 the following items were listed as rose’s pro_rata share of zephyr’s items of income loss and deduction on rose’s schedules k-1 shareholder’s share of income credits deductions etc that were attached to zephyr’s forms 1120s for through year item amount ordinary_loss from business activities dollar_figure big_number interest_income net_long-term_capital_gain ordinary_loss from business activities big_number interest_income ordinary_loss from business activities big_number interest_income b as reported on the roses’ income_tax returns on their joint income_tax returns for through the roses reported losses of dollar_figure dollar_figure and dollar_figure respectively with respect to their interest in zephyr the roses attached the following statement in pertinent part to their joint income_tax return for the above mentioned taxpayers have elected to carryforward the net operating lossess sic of the following companies for the tax period ending the amount of dollar_figure of unapplied net_operating_loss from zephyr rock lime inc was carried forward to of this amount dollar_figure was applied in schedule e line 31a and the balance of dollar_figure carried forward in addition unused outstanding amounts have been carried forward zephyr rock lime inc dollar_figure zephyr rock lime inc of dollar_figure this statement was signed by the roses and dated date in sum the roses carried forward losses from zephyr totaling dollar_figure the roses attached the following statement in pertinent part to their joint income_tax return for the above mentioned taxpayers have elected to carryforward the net operating lossess sic of the following companies for the tax period ending the amount of dollar_figure unapplied net_operating_loss from zephyr rock lime inc has been carried forward this statement was signed by the roses and dated date the roses attached the following statement in pertinent part to their joint income_tax return for the above mentioned taxpayers have elected to apply the net operating losses of the following company for the tax period ending the amount of dollar_figure of net operating losses from zephyr rock lime inc have been applied c irs determinations the irs determined that the roses could deduct the losses that they reported from zephyr on their joint income_tax returns for and to the extent of the basis in their zephyr interest the irs determined that as of date the roses’ basis in their zephyr interest was dollar_figure which included the following amounts source original investment note given to mills constructive dividends loss deducted in loss deducted in amount dollar_figure big_number big_number big_number big_number furthermore the irs determined that as of date the roses had not deducted dollar_figure of their share of the losses that zephyr had incurred during and after taking into consideration the dollar_figure loss that the roses claimed on their joint income_tax return for with respect to their interest in zephyr the irs determined that the roses could deduct an additional dollar_figure 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 and accordingly the irs decreased the roses’ taxable_income by dollar_figure for and increased the roses’ taxable_income by dollar_figure for and dollar_figure for transactions involving slpc tpc and the roses during and effective date 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 s_corporations during and slpc was wholly owned by rose during and rose also held an ownership_interest in tpc during and slpc realized gross_receipts or sales of zero in and and had a combined total income of dollar_figure for those years slpc became insolvent during during slpc incurred large losses because its pipeline was shut down for major repairs on date rose paid dollar_figure of the amount that slpc owed to tpc by reducing the amount that tpc owed to him this transaction was recorded on tpc’s books by journal entries that reduced the amount that it owed to rose by dollar_figure as well as the amount that slpc owed to it by dollar_figure the transaction was reflected on the books of slpc by journal entries that reflected a dollar_figure reduction in the amount that it owed to tpc and a dollar_figure increase in the amount that it owed to rose the roses deducted losses from slpc totaling dollar_figure on their joint income_tax return for rose paid an additional dollar_figure of slpc’s debt to tpc during by reducing the amount that tpc owed to him this transaction was recorded on tpc’s books by journal entries that reduced the amount that it owed to rose by dollar_figure as well as the amount that slpc owed to it by dollar_figure the transaction was reflected on the books of slpc by journal entries that reflected an dollar_figure reduction in the amount that it owed to tpc and an dollar_figure increase in the amount that it owed to rose the roses deducted losses from slpc totaling dollar_figure on their joint income_tax return for as of date the outstanding principal balance of the transactions between slpc and the roses was no less than the outstanding principal balance of those transactions as of furthermore between and date the outstanding principal balance of the transactions between slpc and the roses remained substantially unchanged a as described in slpc and the roses’ income_tax returns on the schedule l attached to slpc’s form_1120s for slpc’s other current liabilities were reported to be dollar_figure as of the beginning of that year and dollar_figure as of the end of that year of these amounts slpc reported that dollar_figure and dollar_figure respectively were due to affiliate also on this schedule l slpc’s loans from shareholders were reported to equal dollar_figure as of the end of there were no amounts separately identified as interest payments made and or imputed by slpc to the roses on its form_1120s for there were no amounts separately identified as interest payments received and or imputed by the roses from slpc on their joint income_tax return for on the schedule l attached to slpc’s form_1120s for slpc’s other current liabilities were reported to be dollar_figure as of the end of that year of that amount slpc reported that dollar_figure was due to affiliate also on this schedule l slpc’s loans from shareholders were reported to equal dollar_figure as of the end of there were no amounts separately identified as interest payments made and or imputed by slpc to the roses on its form_1120s for there were no amounts separately identified as interest payments received and or imputed by the roses from slpc on their joint income_tax return for b irs determinations the irs determined that the roses could deduct the losses that they reported from slpc on their joint income_tax returns for and to the extent of the basis in their slpc interest in calculating the roses’ basis in their slpc interest for those years the irs determined that the dollar_figure transaction between tpc and slpc in and the dollar_figure transaction between tpc and slpc in did not constitute debt owed to the roses and did not increase the roses’ basis in their slpc interest the irs determined that there was not an actual economic outlay by the roses and that the debt was not directly attributable to the roses the irs determined that the roses had a dollar_figure basis in their slpc interest as of the end of and had no basis in their slpc interest as of the end of consequently the irs determined that the roses could deduct dollar_figure of slpc’s losses in and none of slpc’s losses in the irs increased the roses’ taxable_income by dollar_figure for and by dollar_figure for imposition of accuracy-related_penalties by the irs the roses signed their joint income_tax returns for and on date date date and date respectively there was no paid preparer’s information listed on any of these returns there were no forms disclosure statement attached to these returns the irs determined accuracy-related_penalties under sec_6662 with respect to the roses for and the accuracy-related_penalties were determined to be due to substantial understatements of income_tax by the roses for those years the irs determined that all or part of the underpayments of tax for those years was attributable to non-tax-shelter items for which there was no substantial_authority or that were not adequately disclosed in the returns or in statements attached to the returns furthermore the irs determined that it had not been established that these underpayments were due to reasonable_cause procedural matters opinion pkv s and the roses filed their respective petitions with the court on march and date rose as the designated tax_matters_partner for pkvi lp filed a petition_for_readjustment of partnership items under code sec_6226 with the court on date by notices served on date date and date these cases were set for trial months after the dates of the respective notices attached to each of the notices setting case for trial was the court’s standing_pretrial_order the standing_pretrial_order provided in pertinent part as follows to facilitate an orderly and efficient disposition of all cases on the trial calendar it is hereby ordered that all facts shall be stipulated to the maximum extent possible all documentary and written evidence shall be marked and stipulated in accordance with rule b unless the evidence is to be used solely to impeach the credibility of a witness any documents or materials which a party expects to utilize in the event of trial except solely for impeachment but which are not stipulated shall be identified in writing and exchanged by the parties at least days before the first day of the trial session the court may refuse to receive in evidence any document or material not so stipulated or exchanged unless otherwise agreed by the parties or allowed by the court for good cause shown on each of these occasions the cases were continued on the joint motion or request of the parties on three subsequent occasions the cases were set for trial standing pretrial orders were served and the cases were continued on motion of one of the parties on date the court issued orders that inter alia required the parties to exchange all nonstipulation material including any schedules charts and other documents that collected or summarized testimony or documents that were for impeachment purposes by date and required the parties to exchange a list of all documents already in the possession of opposing counsel on date these cases were set for trial to commence on date the parties were directed to comply with the standing_pretrial_order that was served on date a copy of which was attached during trial of these cases on february petitioners attempted to move into evidence a large number of documents that had not been provided to respondent until sometime on or after date a significant portion of these documents had not been provided to respondent until the morning of date respondent objected to many of these documents’ being received in evidence on the grounds that the documents were hearsay and had not been exchanged in accordance with the numerous standing pretrial orders that the court had issued in these cases we sustained respondent’s objections to those documents and summaries of those documents offered in evidence by petitioners there was no excuse for the belated tender of documents and we reaffirm our rulings on respondent’s objections the documents not received in evidence have not been considered in our findings_of_fact issue 1--transfers from pk ventures to the zephyr purchasers whether a withdrawal of funds from a business by one of its owners or an advance made to a business by one of its owners creates a true debtor-creditor relationship is a factual question to be decided based on all of the relevant facts and circumstances see 88_tc_604 affd without published opinion 855_f2d_855 8th cir see also 52_tc_255 affd 422_f2d_198 5th cir 29_tc_1193 affd 271_f2d_267 5th cir for disbursements to constitute bona_fide loans there must have been at the time that the funds were transferred an unconditional obligation on the part of the transferee to repay the money and an unconditional intention on the part of the transferor to secure repayment haag v commissioner supra pincite see also haber v commissioner supra pincite direct evidence of a taxpayer’s state of mind is generally unavailable so courts have focused on certain objective factors to distinguish bona_fide loans from disguised dividends and other distributions compensation and contributions to capital the factors considered relevant for purposes of identifying bona_fide loans include the existence or nonexistence of a debt_instrument provisions for security_interest payments and a fixed payment_date the right to enforce the payment of principal and interest whether repayments were made the source of the funds used to repay the creditor the failure of the debtor to pay on the due_date or to seek a postponement a status equal to or inferior to that of regular business creditors thin or adequate capitalization the debtor’s ability to obtain loans from outside lending institutions identity of interest between the business owner and the debtor or creditor the extent of a business owner creditor’s participation in management and treatment of the transferred funds on the business’s books see 464_f2d_394 5th cir in re indian lake estates inc 448_f2d_574 5th cir see also haag v commissioner supra pincite n haber v commissioner supra pincite each case turns on its own factors and ‘differing circumstances may bring different factors to the fore ’ 659_f2d_618 5th cir quoting 561_f2d_572 5th cir when the transferee or transferor is in substantial control of the business such control invites a special scrutiny of the situation see haber v commissioner supra pincite roschuni v commissioner supra pincite see also 513_f2d_800 5th cir we have applied these principles when analyzing transfers between two closely held businesses that share a common ownership but are otherwise unrelated see eg stinnett’s pontiac serv inc v commissioner tcmemo_1982_314 affd 730_f2d_634 11th cir see also marcy v commissioner tcmemo_1994_534 petitioners contend that the facts and circumstances of these cases establish that transfers from pk ventures to the zephyr purchasers were bona_fide loans furthermore petitioners contend that these alleged debts became worthless during the years in which pkv s claimed bad_debt deductions on its consolidated income_tax returns conversely respondent contends that the facts and circumstances of these cases establish that the transfers were not bona_fide loans respondent also contends that in any event none of these alleged debts became worthless during the years in which pkv s claimed bad_debt deductions on its consolidated income_tax returns we consider these contentions below petitioners contend that because the summit trust loan was a bona_fide loan the transfers from pk ventures to the zephyr purchasers were also bona_fide loans petitioners are essentially relying on the circumstances surrounding the summit trust loan to establish that the transfers from pk ventures to the zephyr purchasers were bona_fide loans petitioners do not cite any authority to support this contention after considering the relevant factors and weighing the evidence we reject petitioners’ contention that the transfers from pk ventures to the zephyr purchasers were bona_fide loans for the reasons discussed below first pk ventures did not receive promissory notes from the zephyr purchasers in exchange for its transfer of dollar_figure million to them second no evidence indicates that the zephyr purchasers made any agreement with pk ventures as to the time of repayment or the interest to be paid third while pk ventures provided security for its repayment of the summit trust loan to summit trust no evidence indicates that the zephyr purchasers provided any collateral or security for repayment of the transfers that they received from pk ventures fourth the zephyr purchasers did not make any payments of principal or interest to pk ventures and no accrued interest attributable to these transfers was posted to pk ventures’ general ledger or reported in its audited financial statements furthermore there is no indication that any accrued interest attributable to these transfers was reported in pkv s’s consolidated income_tax returns for or fifth no evidence indicates that pk ventures had the right to enforce the payment of principal and interest with respect to its transfers to the zephyr purchasers sixth of the zephyr purchasers were shareholders of pk ventures as of date these nine zephyr purchasers owned dollar_figure percent of the stock of pk ventures of the dollar_figure million transferred from pk ventures to the zephyr purchasers rose received dollar_figure an amount proportional to his 40-percent interest in pk ventures there is no evidence of the specific amounts transferred from pk ventures to each of the nine other zephyr purchasers seventh based upon rose’s experience in corporate finance we are convinced that he could have documented the transfers from pk ventures to the zephyr purchasers with promissory notes and arranged for these transfers to occur under terms significantly closer to arm’s length than those that were actually chosen this conclusion is bolstered by our consideration of the structure and formality of the financing arrangements into which pk ventures had entered in connection with the purchase of the stock of slpc tbpc tpc and tptc the summit trust loan the financing arrangements into which rose had entered in connection with his acquisition of control of pk ventures during and the financing arrangements between pkvi lp and unrelated parties eighth the labels given to the transfers from pk ventures to the zephyr purchasers on pk ventures’ audited financial statements for the years ended date date and date and on the schedules l attached to pkv s’s consolidated income_tax returns for and cannot overcome the substance of these transfers see estate of mixon v united_states f 2d pincite cf 293_us_465 based upon our analysis of the relevant factors we conclude that these transfers were in substance distributions of property from pk ventures to its shareholders because the transfers from pk ventures to the zephyr purchasers were not bona_fide loans we need not decide questions of worthlessness and timing see sec_1_166-1 income_tax regs only a bona_fide debt qualifies for purposes of sec_166 accordingly we sustain respondent’s determination that pkv s is not entitled to bad_debt deductions of dollar_figure and dollar_figure on its consolidated income_tax returns for and respectively for the transfers from pk ventures to the zephyr purchasers respondent determined that pk ventures’ transfer of dollar_figure to rose in connection with the zephyr purchase constituted a constructive_dividend to him in consequently respondent increased the roses’ taxable_income by dollar_figure in and determined that the roses should not have reported dollar_figure of cancellation_of_indebtedness_income on their joint income_tax return for we agree that the roses should not have reported dollar_figure of cancellation_of_indebtedness_income on their joint income_tax return for because as we discussed above pk ventures’ transfer of dollar_figure to rose in connection with the zephyr purchase was not a bona_fide loan with respect to respondent’s treatment of the dollar_figure transfer as a dividend distribution in petitioners contend that because the transfer occurred in the transfer could only be a dividend distribution to rose in that year rather than in respondent has not offered an explanation as to why this dollar_figure transfer should be treated as a dividend distribution to rose in because we have decided that the transfer from pk ventures to rose in connection with the zephyr purchase was not a bona_fide loan we agree with petitioners and we hold that the transfer is not a dividend distribution to rose in or in any of the other years before the court in these cases see sec_1_301-1 income_tax regs see also r t developers inc v commissioner tcmemo_1973_128 237_fsupp_533 d n j affd per curiam on other issues 353_f2d_212 3d cir issue 2--transfers from pk ventures tbpc and tptc to pkvi lp approximately two-thirds dollar_figure out of dollar_figure transferred from pk ventures and its subsidiaries to pkvi lp was transferred during through an fpaa was issued to pkvi lp only for pkvi lp was a partnership subject_to the provisions of the tax equity and fiscal responsibility act of tefra partially codified at secs the parties agree that the characterization of transfers from a partner to a tefra partnership as debt or equity is a partnership_item that can be adjusted only upon issuance of an fpaa see sec_301_6231_a_3_-1 a -1 c i proced admin regs in the absence of a valid fpaa for a particular year neither respondent nor the court may adjust partnership items for that year see generally 87_tc_783 for however in the fpaa sent to pkvi lp respondent disallowed_interest_expense in the amount of dollar_figure because it had not been established that the interest_expense was attributable to a bona_fide debt thus in determining whether that interest_expense_deduction is allowable we have found facts relating to the transfers and applied the factors discussed in the preceding section to determine whether the transfers were bona_fide debt or capital contributions petitioners argue that the following factors support their contention that the transfers from pk ventures tbpc and tptc to pkvi lp during through were bona_fide loans formal indicia of debt risk involved participation in management and identity of interest intent of the parties capitalization independent financing and acquisition of capital assets and failure to repay on the due_date in making their argument petitioners do not attempt to distinguish the transfers from tbpc and tptc to pkvi lp from the transfers between pk ventures and pkvi lp accordingly from this point forward we refer to these transfers as occurring between pk ventures and pkvi lp after considering the relevant factors and weighing the evidence we reject petitioners’ contention that the transfers from pk ventures to pkvi lp were bona_fide loans for the reasons discussed below first we are unpersuaded that the pkvi lp promissory notes are reliable evidence of any indebtedness between pkvi lp and pk ventures there is no indication that the pkvi lp promissory notes were completed contemporaneously with pkvi lp’s receipt of funds from pk ventures rather rose testified that his preparation of the pkvi lp promissory notes was ministerial and completed on a cumulative basis so as to account for the total amount of the transfers from pk ventures to pkvi lp in preparation for the yearly audit of these businesses’ financial records moreover at the time that rose signed the dollar_figure promissory note ie the note representing the aggregate amount of the transfers from pk ventures to pkvi lp during through rose as a general_partner with a 70-percent interest in pkvi lp neither intended to have pkvi lp repay any of this amount to pk ventures nor intended to repay any of this amount himself these facts undermine the reliability of the pkvi lp promissory notes in addition the purported terms of the pkvi lp promissory notes were contradicted by the statements made in pkvi lp’s audited financial statements for the year ended date and pkv s’s audited consolidated financial statements for the year ended date that the transfers from pk ventures tbpc and tptc to pkvi lp did not bear interest accordingly we are unpersuaded that the existence of the pkvi lp promissory notes justifies a conclusion that the transfers from pk ventures to pkvi lp were bona_fide loans second unlike the basic structure of pkvi lp’s debt to unrelated parties the transfers from pk ventures to pkvi lp were not secured_by the hydroelectric properties owned by pkvi lp did not have a fixed payment_date and as established by pkvi lp’s audited financial statements for the year ended date and pkv s’s audited consolidated financial statements for the year ended date did not bear interest third no evidence indicates that pkvi lp actually made any payments of principal or interest to pk ventures moreover pkv s’s inconsistent reporting of imputed_interest payments from pkvi lp on its consolidated income_tax returns for through does not persuade us that the transfers from pk ventures to pkvi lp were bona_fide loans fourth no evidence indicates that pk ventures had the right to enforce the payment of principal or interest with respect to its transfers to pkvi lp rather pk ventures and pkvi lp agreed that pkvi lp would not make any payments of principal or interest if such payments would have caused it to default or breach any other note or agreement to which it was a party this agreement subordinated the right of pk ventures to demand payment of its transfers to pkvi lp to the rights of pkvi lp’s creditors fifth pkvi lp was thinly capitalized pkvi lp reported dollar_figure of capital contributions on its books pkvi lp had approximately times more debt to unrelated parties than it had equity at the end of times more at the end of times more at the end of and times more at the end of and times more at the end of if the transfers from pk ventures to pkvi lp are treated as debt and included in this analysis these ratios would increase to approximately at the end of at the end of and at the end of pkvi lp was experiencing serious financial difficulties as of and these difficulties continued through and sixth after pkvi lp was unable to obtain any additional financing from unrelated parties other than a dollar_figure loan from first fidelity pkvi lp entered into this loan agreement with first fidelity on or before date pkvi lp was also able to renegotiate its outstanding loan agreements with liberty life and mgfp between date and date but no additional financing was provided to pkvi lp by either liberty life or mgfp as part of these renegotiated agreements furthermore a substantial portion if not all of the dollar_figure that was transferred from pk ventures to pkvi lp was received by pkvi lp during and after the timing of the transfers from pk ventures to pkvi lp coupled with pkvi lp’s inability to obtain additional financing from unrelated parties does not support a conclusion that the transfers from pk ventures to pkvi lp were bona_fide loans seventh besides the initial capital contributions that were made to pkvi lp no evidence indicates that any of pkvi lp’s limited partners other than pk ventures transferred funds to the partnership between date and date during that period pk ventures’ limited_partnership_interest in pkvi lp increased from zero to percent ie pk ventures acquired the entire limited_partnership_interest in pkvi lp pk ventures’ increased ownership_interest in pkvi lp was due in large part to partners owning at least dollar_figure percent of pkvi lp’s limited_partnership interests assigning their interests in the partnership to pk ventures for apparently no consideration other than relief from the partnership’s liabilities furthermore these assignments occurred during the time in which pkvi lp was experiencing serious financial difficulties these facts do not support a conclusion that the transfers from pk ventures to pkvi lp were bona_fide loans rather these facts indicate that pk ventures gained a greater ownership_interest in pkvi lp by its willingness to assume the liabilities of the partnership and to provide the partnership with capital to pay those liabilities eighth as a result of holding approximately percent of the partnership interests in pkvi lp as of date rose and pk ventures gained the exclusive right power and authority to make calls for additional capital contributions on behalf of pkvi lp to permit a withdrawal of capital by any partner to admit an additional partner to the partnership to permit the withdrawal of any partner from the partnership to designate any additional investments for the partnership and to determine the participating percentages of the partners in such additional investments to sell or otherwise dispose_of all or substantially_all of the partnership’s property attributable to any investment to permit any agreement between the partnership and any general_partner or any person controlled by or controlling or under common_control with a general_partner and to permit the transfer or assignment in whole or in part by a partner of his interest in the partnership prior to date pk ventures needed the approval of limited partners holding at least percent of the aggregate voting percentages of the limited partners of pkvi lp to exercise its authority over these matters pk ventures’ increased participation in pkvi lp’s affairs during the time in which it was transferring significant amounts of funds to the partnership does not support a conclusion that the transfers from pk ventures to pkvi lp were bona_fide loans ninth based upon rose’s experience in corporate finance we are convinced that he could have arranged for the transfers from pk ventures to pkvi lp to occur under terms significantly closer to arm’s length than those that were actually chosen this conclusion is bolstered by our consideration of the structure and formality of the financing arrangements into which pk ventures had entered in connection with the purchase of the stock of slpc tbpc tpc and tptc the summit trust loan the financing arrangements into which rose had entered in connection with his acquisition of control of pk ventures during and the financing arrangements between pkvi lp and unrelated parties tenth although some of the labels used to describe the transfers from pk ventures to pkvi lp on these businesses’ books classified the transfers as debt these labels cannot overcome the substance of these transfers see estate of mixon v united_states f 2d pincite cf gregory v helvering u s pincite based upon our analysis of the relevant factors we conclude that these transfers were in substance contributions of capital from pk ventures to pkvi lp based on the foregoing we sustain respondent’s determination that pkvi lp should not have deducted dollar_figure of interest_expense on its form_1065 for with respect to these transfers the parties agree and the court is persuaded that we do not have jurisdiction over the adjustments made in the notice_of_deficiency sent to pkv s with respect to imputed_interest income reported on forms for and and a bad_debt deduction claimed on form_1120 for issue 3--transfers from pk ventures tbpc and tptc to zephyr the characterization of transfers from pk ventures and its subsidiaries to zephyr is relevant only to the bad_debt deductions claimed by pkv s and disallowed in the notice_of_deficiency for and for those years the treatment of zephyr’s liabilities was an s_corporation item to be determined at the corporate level see sec_301 6245-1t a temporary income_tax regs fed reg date for years beginning after date these procedures do not apply see small_business job protection act of publaw_104_188 110_stat_1755 because no notice of administrative adjustment fsaa was issued to zephyr the nature of the transfers as reported by zephyr cannot be redetermined here issues and 5--partners’ basis in pkvi lp generally a partner may deduct the partner’s distributive_share of losses of a partnership in which the partner is a member sec_702 a partner’s distributive_share of partnership loss is limited to the extent of the adjusted_basis before reduction by current year’s losses of the partner’s interest in the partnership at the end of the partnership year in which such loss occurred sec_704 sec_1_704-1 income_tax regs a partner’s share of loss in excess of the partner’s adjusted_basis at the end of the partnership year will not be allowed for that year sec_1_704-1 income_tax regs any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership sec_704 see also sec_1_704-1 income_tax regs a ny loss so disallowed shall be allowed as a deduction at the end of the first succeeding partnership taxable_year and subsequent partnership taxable years to the extent that the partner’s adjusted_basis for his partnership_interest at the end of any such year exceeds zero before reduction by such loss for such year sec_465 imposes a further limitation on a partner’s distributive_share of partnership losses under sec_465 losses relating to activities engaged in by a taxpayer in carrying_on_a_trade_or_business or for the production_of_income are allowed as deductions only to the extent that the taxpayer is at risk financially with respect to the activities sec_465 c investors generally are considered to be at risk financially to the extent that they contribute money to the activities sec_465 in addition investors are considered to be at risk financially with respect to third-party debt obligations relating to the activities to the extent that they are personally liable for repayment of the debt obligations or to the extent that they have pledged property other than property used in the activities as security for the debt obligations sec_465 and the determination of whether a taxpayer is to be regarded as at risk on a particular debt obligation is to be made at the end of each taxable_year sec_465 91_tc_838 sec_465 does not affect either the amount of a partner’s distributive_share of partnership loss that the partner is otherwise allowed to deduct under sec_704 or the adjustment that must be made to the basis of the partner’s interest in the partnership under sec_705 as a result of that loss deduction see eg allen v commissioner tcmemo_1988_166 if the amount of partnership loss that a partner is allowed to deduct under sec_704 exceeds the amount for which the partner is at risk under sec_465 however such excess is subject_to the carryover provisions of sec_465 see eg id sec_465 provides that this excess_amount shall be carried over to succeeding years these losses will be deductible when the taxpayer injects more funds into the activity id in these cases the parties dispute whether pk ventures had sufficient basis in its pkvi lp interest during and to deduct the losses that it claimed from pkvi lp on pkv s’s consolidated income_tax returns for those years and whether the roses had sufficient basis in their pkvi lp interest during and to deduct the losses that they claimed from pkvi lp on their joint federal_income_tax returns for those years the parties also dispute whether pk ventures and the roses are limited by the at_risk_rules of sec_465 with respect to these loss deductions a partner’s adjusted_basis in the partner’s interest in the partnership is the basis of such interest determined under sec_722 increased by the partner’s distributive_share of income and decreased by the partner’s distributive_share of loss and applicable expenditures sec_705 and the basis of an interest in a partnership acquired by a contribution of property including money is the amount of money and the adjusted_basis of such property to the partner at the time of contribution increased by the amount of any gain recognized under sec_721 at the time sec_722 any increase in a partner’s share of the liabilities of the partnership is considered a contribution of money by such partner to the partnership and consequently increases the basis of the partner’s interest in the partnership sec_705 sec_722 sec_752 any decrease in a partner’s share of the liabilities of the partnership is considered a distribution of money to the partner by the partnership and consequently decreases the basis of the partner’s interest in the partnership sec_705 sec_733 sec_752 the basis of a partner’s interest in the partnership cannot be decreased below zero see sec_705 calculation of the roses’ basis and of pk venture’s basis in their respective pkvi lp interests for purposes of these cases must be consistent with treatment of the transfers from pk ventures and its subsidiaries to pkvi lp on the latter’s returns for the years of the transfers with respect to however we have determined the character of those transfers and have jurisdiction to do so as a result of respondent’s disallowance of imputed_interest expense in the fpaa issued for petitioners argue that respondent did not specifically recharacterize the transfers in the fpaa and that respondent waived any adjustments other than interest_expense based on recharacterization of those transfers and is precluded from raising them in this proceeding respondent argues that the court does have jurisdiction to resolve the character of the transfers for all of the years but acknowledges that the tax effects of our conclusions require separate analysis the nature of the transfers was tried by consent and was the predominant issue during trial and in the briefs of the parties thus transfers during should be regarded as equity contributions to pkvi lp in the calculation of the partners’ basis but transfers prior to and subsequent to shall be treated for basis purposes consistent with reporting on pkvi lp’s returns similarly any other adjustments over which we have no jurisdiction should not be included in the basis calculations for purposes of this case issue 6--the roses’ basis in their zephyr interest an s corporation’s income losses and deductions are passed through pro_rata to its shareholders see sec_1366 the total amount of the s corporation’s losses and deductions that can be passed through to a shareholder in any taxable_year is limited to the sum of that shareholder’s adjusted_basis in his or her stock and the adjusted_basis of any indebtedness owed by the corporation to that shareholder sec_1366 a taxpayer’s share of any s_corporation loss in excess of his or her adjusted_basis may be carried over indefinitely sec_1366 in these cases the parties dispute whether the roses had a sufficient basis in their zephyr interest during and to deduct the losses that they claimed from that s_corporation on their joint federal_income_tax returns for those years whether or not an fsaa was sent to zephyr for no such notice is before the court in these cases thus we do not have jurisdiction to redetermine zephyr’s actual income or loss and the consequential increases or decrease in basis the roses did not assign error in their petition to respondent’s determination of their basis in their zephyr interest during and under rule b any issue not raised in the assignment of errors is deemed conceded by the taxpayer 78_tc_646 73_tc_736 furthermore the roses made the following concession in their petition with respect to that determination a the petitioners concede the adjustments proposed by the respondent with respect to zephyr rock lime inc adjustment c wherein the respondent proposes to allow the petitioners an additional deduction in in the amount of dollar_figure and to disallow deductions in and in the amounts of dollar_figure and dollar_figure respectively subsequent to the roses’ filing their petition with the court the supreme court issued its opinion in 531_us_206 in gitlitz v commissioner supra the supreme court held that shareholders of an insolvent s_corporation may increase their basis in their interest in the s_corporation by their pro_rata share of cancellation of indebtedness cod income to the s_corporation id pincite petitioners filed their trial memorandum with the court on date in their trial memorandum petitioners made the following assertion the commissioner has failed to increase mr rose’s basis in zephyr to account for rose’s proportionate share of excluded cancellation_of_indebtedness_income arising from the zephyr bankruptcy mr rose’s basis should be increased by approximately dollar_figure to reflect the amount of this gitlitz adjustment in respondent’s trial memorandum also filed with the court on date respondent claimed that the following issue was unresolved whether petitioners have sufficient basis to deduct claimed flow-through losses from zephyr rock lime inc in and in their posttrial briefs dealing with basis issue petitioners contended that the supreme court’s holding in gitlitz v commissioner supra should allow the roses to increase their basis in their zephyr interest by their share of zephyr’s cod income resulting from its bankruptcy petitioners further contended that zephyr recognized cod income in and that the roses’ share of zephyr’s cod income was at a minimum approximately dollar_figure petitioners supported their argument by rose’s testimony at trial concerning zephyr’s outstanding liabilities in and petitioners concluded with the upward adjustment of rose’s basis resulting from the pass through of income_from_discharge_of_indebtedness that is excluded from gross_income under sec_108 rose may deduct his share of zephyr’s losses up to the amount of his basis including any losses that were previously suspended at the corporate level because of a lack of basis in prior years conversely respondent contended that gitlitz v commissioner supra does not create a situation in which a taxpayer is allowed an increase in basis without any proof that a debt has been discharged or the amount thereof respondent further contended that petitioners have offered no proof whatsoever regarding the amount of any debt which was discharged in zephyr rock’s chapter proceeding seeking instead to rely on the principle established by the supreme court in gitlitz without proving the amount of the purported debt discharged respondent concluded that petitioners have failed to present any evidence establishing or to otherwise support a tax basis in excess of the amount which the respondent has agreed to allow in respondent’s supplemental brief respondent conceded however that as of date the roses had additional basis of dollar_figure in their zephyr interest as a result of the discharge of zephyr’s indebtedness through its bankruptcy proceeding in making this concession respondent asserted the evidence relied upon by the respondent in support of this concession is not part of the record of these cases this concession is based upon documentation that was supplied to the respondent several months after the trial record for these cases was closed petitioners raised two additional contentions for the first time in their supplemental brief filed date the first contention dealt with respondent’s determination to include a dollar_figure note that rose gave to mills in the calculation of roses’ basis in their zephyr interest the second contention dealt with treating the entire amount of the transfers from pk ventures tbpc and tptc to zephyr as constructive dividends to rose because these contentions were raised by petitioners for the first time in their supplemental brief we did not consider them in reaching our decisions in these cases see rule sec_31 sec_41 99_tc_132 affd sub nom 28_f3d_1024 10th cir 96_tc_858 affd 959_f2d_16 2d cir 92_tc_376 affd 920_f2d_1196 5th cir 64_tc_989 in respondent’s supplemental brief filed date respondent attempted to amend respondent’s determination to include the dollar_figure of constructive dividends in the roses’ basis in their zephyr interest and thus increase the deficiency determined against the roses respondent did not seek to raise this new position at or before trial of these cases furthermore respondent had not argued that respondent’s determination to treat a portion of the transfers from pk ventures tbpc and tptc to zephyr as a constructive_dividend to the roses was incorrect in their memorandum in support of their motion for reconsideration of findings and opinion filed months after release of our now-withdrawn opinion petitioners contended for the first time that the statutory_notice_of_deficiency sent to the roses-- is invalid to the extent it excludes from the roses’ basis in zephyr a proportionate share of zephyr’s excluded cod income moreover since respondent failed to adjust zephyr’s excluded cod income in a fsaa issued to zephyr this court did not have jurisdiction to sustain respondent’s adjustment to be clear petitioners do not argue that the court is without jurisdiction to determine the roses’ outside_basis in zephyr rather petitioners argue only that the court did not have jurisdiction to determine the roses’ or any other shareholder’s share of zephyr’s excluded cod income in a shareholder level proceeding at the time of hearing on petitioners’ motion for reconsideration the parties agreed that the court lacked jurisdiction to redetermine the roses’ basis in their zephyr interest petitioners argued for the first time that we really think that the issue here is the return not the return petitioners then proceeded to argue that the schedule l to zephyr’s form_1120s for reflected cod income which was not required to be reported because of sec_108 petitioners now argue that such cod income must be reflected in the calculation of the roses’ basis in zephyr as detailed in our findings_of_fact supra pp no direct references were made and no explanations were provided in zephyr’s forms 1120s as to the amounts that zephyr received from pk ventures and its subsidiaries for years prior to on its form_1120s for zephyr represented that no income or expense items where sic reported on the tax_return due to the fact that the corporation was not solvent after the completion of the bankruptcy petitioners now argue that cod income was reflected on zephyr’s return in an attachment although not on the face of the return because zephyr’s net_loss from operations was eliminated by the amount of excluded cod income and in schedule l to the form_1120 for assets and liabilities were eliminated and retained earnings were increased to reflect cod income of dollar_figure that was excluded under sec_108 respondent argues that the court lacks jurisdiction to increase the basis of the roses in zephyr as belatedly sought by petitioners respondent contends that the court had no jurisdiction to determine basis in excess of the amounts determined in the statutory notice which did not depend on recharacterization or any other determination that would cause the roses’ basis in zephyr to become a partnership_item respondent notes that the roses did not report any cod income from zephyr for or and disputes petitioners’ contention with respect to the effect of the schedule l to the return respondent also contends that the court lacks jurisdiction to increase the roses’ basis in zephyr in accordance with respondent’s concession in view of the extended history of these cases we believe that the interests of justice are best served and jurisdiction is not implicated by accepting the roses’ concession in their petition of the correctness of respondent’s determination of basis as supplemented by respondent’s concession of increased basis we do not believe that we are required to increase basis in accordance with zephyr’s return consistent with a claim made for the first time in a motion for reconsideration and based on an analysis different from and inconsistent with the claim made prior to and during trial and in posttrial briefs specifically addressed to that issue the notice_of_deficiency that was sent to the roses does not purport to redetermine cod income or any other entity-level item so cases holding notices of deficiency invalid as to items where there has not been a prior entity-level proceeding are not in point see 94_tc_853 as detailed in our findings_of_fact no direct references were made and no explanations were provided in zephyr’s forms 1120s as to the amounts that zephyr received from pk ventures and its subsidiaries for years prior to on its form_1120s for zephyr represented that no income or expense items where sic reported on the tax_return due to the fact that the corporation was not solvent after the completion of the bankruptcy petitioners now argue that cancellation_of_indebtedness_income was reflected on zephyr’s return in an attachment although not on the face of the return because zephyr’s net_loss from operations was eliminated by the amount of excluded cod income and in schedule l to the form_1120 for assets and liabilities were eliminated and retained earnings were increased to reflect cod income of dollar_figure that was excluded under sec_108 petitioners would have the notice_of_deficiency make an affirmative adjustment in the absence of an entity-level proceeding reflected in an fsaa respondent contends that the claim of increased basis could have been raised by the roses in an administrative_adjustment_request under sec_6227 but that such a request is now barred we conclude however that the burden of timely pleading and proving an increase in basis was on petitioners here and they did not do so in a timely manner thus the starting point for calculation of the roses’ basis will be the notice_of_deficiency and the only adjustments to that amount will be for items conceded by respondent or determined within the scope of our jurisdiction in these cases issue 7--the roses’ basis in their slpc interest petitioners contend that the roses’ basis in their slpc interest should be increased as a result of the dollar_figure transaction that occurred between slpc tpc and rose during and the dollar_figure transaction that occurred between slpc tpc and rose during in support of this contention petitioners argue that respondent has conceded the bona fides of the transactions between slpc tpc and rose during and through the following stipulation at date mr rose paid dollar_figure of the amount which st louis owed tampa pipeline corporation by reducing the amount which tampa pipeline corporation owed him the transaction was recorded on tampa pipeline corporation’s books by a journal entry reducing the amount which it owed rose by dollar_figure and reducing the amount which st louis pipeline owed it by dollar_figure the transaction was recorded in the audited financial statements and tax returns for the transaction was reflected on the books of st louis pipeline by a journal entry reflecting a dollar_figure reduction it owed tampa pipeline company and an increase of dollar_figure in the amount it owed rose during rose paid an additional dollar_figure of st louis pipeline’s debt to tampa pipeline company by reducing the amount tampa pipeline owed him tampa pipeline recorded the transaction by a journal entry reducing by dollar_figure the amount which it owed rose and the amount which st louis pipeline owed tampa pipeline st louis pipeline also recorded the transaction in a journal entry reducing its indebtedness to tampa pipeline by dollar_figure and increasing its indebtedness to rose by dollar_figure the transaction was recorded in the audited financial statements and the tax returns for in further support of this contention petitioners argue that the transactions between slpc tpc and rose were more than mere book entries and that a change in rose’s rights to repayment has in fact occurred petitioners cite only revrul_75_144 1975_1_cb_277 in support of their contention conversely respondent contends that the roses’ basis in their slpc interest should not be increased as a result of the dollar_figure transaction that occurred between slpc tpc and rose during and the dollar_figure transaction that occurred between slpc tpc and rose during in support of this contention respondent argues that the transactions between slpc tpc and rose during and were merely book entries lacking economic_substance of any sort as discussed below we agree with respondent we are unpersuaded that the quoted stipulation is any kind of concession on the part of respondent the stipulation merely outlines the manner in which the transactions between slpc tpc and rose during and were recorded on the books of slpc and tpc the stipulation neither establishes that these transactions had economic_substance nor that these transactions gave rise to a bona_fide debt between slpc and rose an s_corporation shareholder must make an actual economic outlay to the s_corporation in order to increase the basis of his or her interest in the s_corporation 174_f3d_928 8th cir see also 778_f2d_769 11th cir 535_f2d_309 5th cir affg 63_tc_468 103_tc_711 a shareholder makes an actual economic outlay to an s_corporation by engaging in a transaction that leaves ‘the taxpayer poorer in a material sense’ when fully consummated 54_tc_1293 quoting 5_tc_250 affd aftr 2d ustc par 8th cir petitioners have failed to address the myriad cases involving transactions factually similar to or indistinguishable from the transactions between slpc tpc and the roses during and see eg underwood v commissioner supra bhatia v commissioner tcmemo_1996_429 wilson v commissioner tcmemo_1991_544 griffith v commissioner tcmemo_1988_445 shebester v commissioner tcmemo_1987_246 for example in underwood v commissioner supra the taxpayers were the sole shareholders of two corporations engaged in the retail barbecue business one of the corporations an s_corporation was consistently unprofitable the other corporation a c_corporation was consistently profitable over the course of approximately months the c_corporation had made loans totaling dollar_figure to the s_corporation which were memorialized by a series of promissory notes the taxpayers’ accountant informed the taxpayers that their losses from the s_corporation would exceed their adjusted_basis in the s_corporation and advised them to increase their basis in the s_corporation so they could utilize the losses in an arrangement not unlike the one herein the c_corporation surrendered the notes of the s_corporation to the s_corporation the taxpayers substituted their personal note to the c_corporation and the s_corporation gave its demand note to the taxpayers the court_of_appeals for the fifth circuit affirming the decision of this court determined that the taxpayers were not entitled to increase their basis in the s_corporation as a result of the arrangement in reaching its decision the court_of_appeals for the fifth circuit discussed the focus of congress at the time sec_1374 the predecessor to sec_1366 was enacted referring initially to the following statement in the legislative_history the amount of the net_operating_loss apportioned to any shareholder pursuant to the above rule is limited under sec_1374 to the adjusted_basis of the shareholder’s investment in the corporation that is to the adjusted_basis of the stock in the corporation owned by the shareholder and the adjusted_basis of any indebtedness of the corporation to the shareholder s rept 85th cong 2d sess 1958_3_cb_922 the court_of_appeals then went on to conclude in the transaction at issue in this case the taxpayers in merely exchanged demand notes between themselves and their wholly owned corporations they advanced no funds to either lubbock or albuquerque neither at the time of the transaction nor at any other time prior to or during was it clear that the taxpayers would ever make a demand upon themselves through lubbock for payment of their note hence as in the guaranty situation until they actually paid their debt to lubbock in the taxpayers had made no additional investment in albuquerque that would increase their adjusted_basis in an indebtedness of albuquerque to them within the meaning of sec_1374 underwood v commissioner supra pincite fn refs omitted in shebester v commissioner supra the taxpayer was a majority shareholder in two s_corporations a l and hennessey in late the taxpayer assumed the liability of a l to hennessey a l’s books were adjusted with a debit to accounts_payable and a credit to notes payable hennessey’s books were adjusted with a debit to the taxpayer’s drawing account and a credit to accounts_receivable at the end of the year the taxpayer’s drawing account was closed by debiting the taxpayer’s undistributed_taxable_income account in an amount including the amount of the debt assumed we concluded that the charge to the taxpayer’s drawing account was not an actual economic outlay stating the taxpayer’s bookkeeping maneuvers merely shifted on paper the liability for prior loans hennessey’s debit to the taxpayer’s drawing account and its subsequent credit to that account and debit to the taxpayer’s undistributed_taxable_income account do not reflect a current economic outlay entitling the taxpayer to increase his basis in a l although the entries in hennessey’s books technically reduced the taxpayer’s book equity such entries could not absent liquidation of hennessey leave the taxpayer poorer in a material sense shebester v commissioner supra citation omitted furthermore petitioners’ reliance on revrul_75_144 1975_1_cb_277 is misplaced the court_of_appeals in 535_f2d_309 5th cir noted the ruling as applied to situations such as is involved here stating in the ruling rev_rul the obligee on the shareholder’s note was an outsider a bank which stood ready to enforce the obligation hence it was clear at the time the substitution occurred that at some future date payment would be required here by contrast the obligee on the taxpayers’ demand note was their own wholly-owned corporation underwood v commissioner supra pincite n after considering the reasoning set forth in the cases discussed above and the dearth of evidence establishing the substance of the transactions between slpc tpc and rose we conclude that the only intended economic_effect of these transactions was to enable the roses to deduct losses from slpc on their joint income_tax returns for and that they would not have otherwise been able to deduct at the time that these transactions were consummated no party either advanced or received any funds rather the transactions occurred through offsetting book entries furthermore there is no evidence that indicates whether a bona_fide debt existed between tpc and rose prior to the occurrence of these transactions or whether tpc had paid rose any of the amounts that it owed to him and we are unpersuaded that the evidence establishes that slpc paid rose any of the amounts that it owed to him after these transactions occurred because these transactions did not leave rose poorer in a material sense when fully consummated we conclude that rose did not make an actual economic outlay by engaging in them accordingly we sustain respondent’s determination that the roses had an insufficient basis in their slpc interest during and to deduct the losses that they claimed from that s_corporation on their joint income_tax returns for those years issue 8--reasonable compensation sec_162 allows as a deduction a reasonable allowance for salaries or other compensation_for_personal_services actually rendered the test for deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services sec_1_162-7 income_tax regs in any event the allowance for the compensation paid may not exceed what is reasonable under all the circumstances sec_1_162-7 income_tax regs reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances id whether an expense that is claimed pursuant to sec_162 is reasonable_compensation for services rendered is a question of fact that must be decided on the basis of the particular facts and circumstances 58_tc_1055 affd without published opinion 474_f2d_1345 5th cir see also 528_f2d_176 10th cir affg 61_tc_564 399_f2d_603 9th cir affg tcmemo_1967_7 there are no fixed rules or exact standards for determining what constitutes reasonable_compensation 228_f2d_637 10th cir affg tcmemo_1954_221 when the case involves a closely_held_corporation with the controlling shareholders setting their own level of compensation as employees the reasonableness of the compensation is subject_to close scrutiny 819_f2d_1315 5th cir affg tcmemo_1985_267 see also tulia feedlot inc v united_states f 2d pincite golden constr co v commissioner supra pincite in these cases the parties dispute the reasonableness of the total compensation paid to rose by pk ventures and its subsidiaries during and and deducted by pkv s on its consolidated income_tax returns for those years petitioners contend that the amounts that pkv s deducted as compensation paid to rose in and were reasonable because a significant portion of these amounts was intended to be deductible as compensation_for services that rose performed for pk ventures and its subsidiaries during through and an analysis of the facts and circumstances of these cases establish that these amounts were reasonable conversely respondent contends that the amounts that pkv s deducted as compensation paid to rose in and were not reasonable because petitioners have failed to establish that a significant portion of these amounts was intended to be deductible as compensation_for services that rose performed for pk ventures and its subsidiaries during through and the testimony provided by petitioners’ expert witness establishes that these amounts were not reasonable we address the parties’ contentions below petitioners contend that a significant portion of the compensation that rose received from pk ventures and its subsidiaries during and was intended to be deductible as compensation_for services that rose performed for those corporations during through in support of this contention petitioners argue that respondent’s determination in the pkv s notice_of_deficiency and paragraph of the stipulation of facts establish that a portion of the compensation deducted by pkv s on its consolidated income_tax returns for and is attributable to deferred_compensation that was paid to rose during those years and rose was insufficiently compensated for his services to pk ventures and its subsidiaries during through as discussed below petitioners’ arguments are unpersuasive paragraph of the stipulation of facts recites the following as is reflected in the notice_of_deficiency the respondent determined that pk ventures is entitled to a deduction for compensation_for rose in the amount of dollar_figure which consists of dollar_figure of then-current compensation and dollar_figure of deferred_compensation the notice_of_deficiency also reflects the determination of the respondent that pk ventures is entitled to a deduction for compensation_for rose in the amount of dollar_figure all of which is then-current compensation paragraph of the stipulation of facts does not add anything to respondent’s determination and it does not establish that respondent’s determination is correct because our conclusions as to deductible amounts are based on the evidence and not on any alleged concession as to deferred_compensation petitioners’ argument as to the effect of this stipulation and of respondent’s determination in the pkv s notice_of_deficiency is unpersuasive notwithstanding this conclusion we do not allow respondent to disavow the amount allowed in the pkv s notice_of_deficiency for deferred_compensation paid to rose in as respondent attempts to do on brief because to do so would be to permit respondent to increase the related deficiency without making a timely claim for it see sec_6214 81_tc_260 see also 69_tc_473 under certain circumstances prior services may be compensated in a later year 281_us_115 in such instances however the taxpayer must establish that there was not sufficient compensation in prior periods and that in fact the current year’s compensation was to compensate for that underpayment 95_tc_525 affd on another ground 965_f2d_1038 11th cir see also pac grains inc v commissioner supra pincite in support of their argument that rose was insufficiently compensated for his services to pk ventures and its subsidiaries during through petitioners claim that a deferred_compensation agreement existed between rose and those corporations during those years and that the going concern notes included in the notes to the audited financial statements for the year ended date for pk ventures slpc tbpc and tptc establish the existence of this deferred_compensation agreement these notes state that each corporation’s management extended payment terms related to certain accrued payables such as officer’s salaries indefinitely subject_to cash availability there is no indication in these notes as to the period of time other than to which these extended payment terms relate or to the amount or percentage of compensation that was not paid to rose moreover there is no evidence of corporate resolutions and or other agreements by pk ventures slpc tbpc or tptc that set forth the terms of these extended payment arrangements in addition pkv s’s audited consolidated financial statements for the years ended date through date made no reference to any extended payment arrangements or to any deferred_compensation arrangement with rose and there was no liability for deferred_compensation reported on the schedules l attached to pkv s’s consolidated income_tax returns for and when questioned on cross-examination about the existence of a deferred_compensation agreement rose testified as follows q by respondent’s counsel did you have an agreement as of the end of between yourself and pk ventures to defer your compensation_for and prior years a by rose being a small company conceptually what we did was the real deal and the real deal was-- is i did not pay myself so i deferred it q did you have an agreement-- a well an agreement as a written_agreement no sir q did you have an understanding sir that you were entitled to compensation in and that you as pk ventures were going to defer that amount into the next or subsequent years a i don’t believe i had an agreement i knew i wanted to be paid the lack of documentation in the corporate records of pk ventures and its subsidiaries and rose’s testimony at trial significantly undermine the inference that petitioners wish for us to draw from these going concern notes consequently we conclude that these notes do not establish the existence of a deferred_compensation agreement between rose and pk ventures and its subsidiaries during through after considering the testimony and lack of evidence supporting petitioners’ position we conclude that no deferred_compensation agreement existed between rose and pk ventures and its subsidiaries during those years as additional support for their argument that rose was insufficiently compensated for his services to pk ventures and its subsidiaries during through petitioners claim rose did not receive any compensation from ventures and its subsidiaries for and in ventures paid rose dollar_figure and in rose was paid dollar_figure in ventures paid rose dollar_figure in sum petitioners claim that rose was paid dollar_figure for his services to pk ventures and its subsidiaries during through the record establishes however that rose received dollar_figure for his services to pk ventures and its subsidiaries during through in addition pk ventures provided health insurance to rose and his family during those years pk ventures provided rose with a company car beginning in and rose received equity interests in both pk ventures and pkvi lp as part of his compensation_for organizing those investment opportunities for printon kane accordingly petitioners’ assertion is incomplete and inaccurate petitioners also claim that the amounts of deferred_compensation listed in pk ventures’ general ledger for establish that rose was not sufficiently compensated for the services that he performed for pk ventures and its subsidiaries during through after considering inter alia rose’s testimony as to the manner in which he calculated the deferred_compensation amounts listed in pk ventures’ general ledger for the lack of any contemporaneous accounting for these amounts prior to and the failure to list these amounts as liabilities in both pkv s’s consolidated financial statements and consolidated income_tax returns we are not persuaded that these amounts represented compensation that rose was owed for his services to pk ventures and its subsidiaries during through rather we conclude that the health insurance_company car and dollar_figure that rose received from pk ventures and its subsidiaries along with the equity interests that rose received in pk ventures and pkvi lp were sufficient compensation_for his services to pk ventures and its subsidiaries during through we conclude that no portion of the amounts that pkv s deducted as officer compensation on its consolidated income_tax returns for and is attributable to deferred_compensation therefore we must decide whether the dollar_figure that pkv s deducted in and the dollar_figure that pkv s deducted in were reasonable amounts of compensation_for the services that rose performed for pk ventures and its subsidiaries during those years the cases contain a lengthy list of factors that are relevant when considering the reasonableness of the compensation deductions claimed by a business including the employee’s qualifications the nature extent and scope of the employee’s work the size and complexities of the business a comparison of salaries paid with gross_income and net_income the prevailing general economic conditions a comparison of salaries with distributions to stockholders the prevailing rates of compensation_for comparable positions in comparable concerns the salary policy of the taxpayer as to all employees and the amount of compensation paid to the particular employee in previous years 73_tc_1142 see also owensby kritikos inc v commissioner f 2d pincite pepsi-cola bottling co of salina inc v commissioner f 2d pincite 166_f2d_221 5th cir affg a memorandum opinion of this court no single factor is determinative home interiors gifts inc v commissioner supra pincite see also owensby kritikos inc v commissioner supra pincite pepsi-cola bottling co of salina inc v commissioner supra pincite each party presented expert testimony in support of its positions on reasonable_compensation levels we are not bound by the opinion of any expert when the opinion is contrary to our own judgment 92_tc_525 affd 933_f2d_1084 2d cir see also 92_tc_312 84_tc_722 we may embrace or reject expert testimony whichever in our judgment is most appropriate 304_us_282 thus we are not restricted to choosing the opinion of one expert over another but may extract relevant findings from each in drawing our own conclusions estate of hall v commissioner supra pincite here the experts’ usefulness is primarily in the data that they collected and analyzed petitioners’ expert dr keith r ugone ugone performed an analysis that focused on determining an amount of total compensation that was reasonable for the services that rose performed for pk ventures and its subsidiaries during through in so doing ugone assumed that a deferred_compensation agreement existed between rose and pk ventures and its subsidiaries during those years as discussed above that assumption was unwarranted as part of this analysis however ugone determined amounts of reasonable_compensation based upon market data for the services that rose performed for pk ventures and its subsidiaries during and in determining the amounts of reasonable_compensation based upon market data ugone identified public companies that were similarly situated to pk ventures during those years ugone identified companies for purposes of his analysis for and ugone also considered data published in several different executive compensation surveys in his analysis based upon the entirety of his analysis ugone concluded that reasonable_compensation amounts for the services that rose performed for pk ventures and its subsidiaries during and were dollar_figure and dollar_figure respectively respondent’s expert paul r dorf dorf identified a peer group of public companies that were similarly situated to pk ventures and whose top executives performed duties similar to those performed by rose dorf identified eight companies for purposes of his analysis in his analysis dorf also considered data published in at least five different executive compensation surveys based upon the entirety of his analysis dorf concluded that reasonable_compensation amounts for the services that rose performed for pk ventures and its subsidiaries during and were dollar_figure and dollar_figure respectively petitioners contend that the compensation that rose received from pk ventures and its subsidiaries during and was reasonable based on an analysis of the following factors dividend history past and present financial conditions nature extent and scope of employee’s work complexity of employer’s business risk assumed by the employee and employee’s qualifications and training petitioners attempt to discount the determinations of reasonable_compensation made by their own expert by arguing that his determinations reflect a conservative approach petitioners also attempt to discredit the determinations of reasonable_compensation made by respondent’s expert by calling his determinations facially suspect furthermore petitioners argue that there is no consensus in the determinations made by ugone and dorf conversely respondent contends that there is an expert consensus as to reasonable_compensation for the duties that rose performed on behalf of pk ventures during and respondent concludes that pkv s should be limited to deducting the reasonable_compensation amounts determined by ugone for and we consider these contentions below we agree with petitioners that a number of factors must be considered when deciding whether compensation is reasonable in situations such as the one presented here with respect to the factors cited by petitioners our review of both experts’ reports leads us to the conclusion that they considered many of these factors as well as others in making their determinations as to reasonable_compensation amounts for and in particular we note the following excerpt from dorf’s report in gathering relevant company data identifying market data conducting our analyses and ultimately rendering our expert opinion we considered the following issues what were mr rose’s qualifications what were mr rose’s duties and responsibilities at pkv what was the financial performance of pkv during the period through what was mr rose’s compensation during the period through how was mr rose’s compensation determined what was the market_value of mr rose’s position during through how did mr rose’s compensation compare to the market_value of similar position s was there a deferred_compensation plan in place at pkv accordingly we are unpersuaded that we should deviate from the reasonable_compensation amounts determined by the experts in these cases rather we conclude that these expert reports establish a consensus as to the amounts of compensation that were reasonable for the services that rose performed for pk ventures and its subsidiaries during and because the experts’ calculations lead to approximations in any event and because rose’s services to pk ventures and its subsidiaries were obviously substantial we give him the benefit of the higher of the amounts determined by the experts using our best judgment on the entire record we conclude that for and reasonable_compensation for rose is dollar_figure and dollar_figure respectively therefore for pkv s is limited to deducting dollar_figure for compensation paid to rose plus an additional dollar_figure to reflect the amount allowed by respondent in the pkv s notice_of_deficiency for deferred_compensation for pkv s is limited to deducting dollar_figure for compensation paid to rose issue 9--penalties respondent determined accuracy-related_penalties with respect to the roses under sec_6662 for substantial understatements of income_tax on their joint income_tax returns for through under sec_6662 a taxpayer may be liable for a penalty of percent on the portion of an underpayment_of_tax due to inter alia any substantial_understatement_of_income_tax sec_6662 an understatement of income_tax is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 an understatement is defined as the excess of the tax required to be shown on the return over the tax actually shown on the return less any rebate sec_6662 the sec_6662 penalty will not be imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 see also 116_tc_438 the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made by taking into account all of the pertinent facts and circumstances sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his or her proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a tax professional see id petitioners argue that the accuracy-related_penalties should not be imposed against the roses because respondent is unable to carry his burden of production as to the penalty pursuant to the requirements of irs sec_7491 petitioners further argue that respondent has failed to adequately consider the reasonable_cause prong of the penalty provision because rose relied on the information returns furnished by ventures and limited and filed his returns consistent with the information returns received from those entities as discussed below petitioners’ arguments are unpersuasive sec_7491 applies to court proceedings arising in connection with examinations commencing after date internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 the record in these cases establishes that respondent’s examination of the roses’ joint income_tax returns began before date furthermore the record in these cases negates reasonable_cause the roses conceded that they failed to report a number of items of income on their joint income_tax returns for through contrary to petitioners’ argument the evidence does not establish that the roses’ failure to report these items of income was the result of rose’s reliance on the tax professionals that prepared the returns for pkv s pkvi lp or zephyr in addition the evidence establishes that the roses’ inability to calculate the bases of their interests in pkvi lp and zephyr and to claim losses from those entities in the correct amounts and in the correct years did not result from the roses’ reliance on the information that was reported on the schedules k-1 that they received from those entities the evidence also establishes that rose was well versed in corporate finance and that he made the decisions regarding the terms and structure of the cash transfers involving pk ventures and its subsidiaries pkvi lp zephyr and the zephyr purchasers consequently any argument as to rose’s reliance on the advice of tax professionals for the treatment of these cash transfers as debt rather than equity contributions or distributions is unconvincing based upon our analysis of the relevant facts and circumstances of these cases we conclude that respondent’s imposition of accuracy-related_penalties against the roses must be sustained if the recalculation of the roses’ income_tax liabilities for through gives rise to substantial understatements of income_tax for those years we have considered the arguments of the parties that were not specifically addressed in this opinion those arguments are either without merit or irrelevant to our decision to reflect the foregoing and the concessions of the parties decisions will be entered under rule