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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 $67,772 for 1990 and by
$100,661 for 1991.
The IRS also determined that PKV&S was not allowed to claim
a bad debt deduction of $1,516,246 on its consolidated income tax
return for 1991 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 1991. Accordingly, the IRS increased
PKV&S’s taxable income by $1,516,246 for 1991.
The IRS determined that PKVI LP should not have imputed
$100,661 of interest expense to PK Ventures on its Form 1065 for
1991 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
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