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As of December 31, 1993, 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
$1,854,939. 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 December 31, 1993. There was no
Schedule L attached to PKVI LP’s Form 1065 for 1993.
B. Transfers From PK Ventures and/or Its Subsidiaries to
PKVI LP
Between 1986 and the end of 1991, 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 (1) the
transfers be repaid on demand with an interest rate of either
8.75 or 9 percent; (2) payment of interest was due only with the
payment of principal; and (3) 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
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