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made.6 Accordingly, we hold that the corporation is not entitled
to deduct the disallowed corporate payments as compensation
expenses pursuant to section 162 for the taxable years in issue.
We next consider the issue concerning petitioners' interest
expense deduction for the Yorkville loan. On Schedule E of their
1988 Federal income tax return, petitioners claimed an interest
expense on the Yorkville loan in the amount of $74,723, which
respondent disallowed.7 Respondent contends that petitioners did
not substantiate that interest on the Yorkville loan was paid.
Alternatively, respondent argues that petitioners did not prove
that the interest on the Yorkville loan was paid from the
6 As we have concluded that petitioners have not established
the requisite intent, we need not address the requirement that
the payment be reasonable.
7 At trial, the parties consented to the trial of the issue of
whether petitioners are entitled to deduct the interest expense
on the Yorkville loan for taxable year 1988. In the notice of
deficiency, respondent disallowed the interest expense in the
adjustment to the category "Rental Loss (Schedule E)" for taxable
year 1988. We note that the notice of deficiency transposed the
names of the adjustments to income entitled "Constructive
Dividend" and "Rental Loss (Schedule E)". Additionally, we note
that, during the course of the proceedings in this Court,
respondent asserted that the amounts in issue in the category
"Rental Loss (Schedule E)" should be increased for taxable years
1987 and 1988, but did not file a motion for leave to amend the
answer. The parties' stipulations as to taxable years 1987 and
1988 are based upon the increased amounts, which are deemed
amendments to the pleadings pursuant to Rule 41(b). Nonetheless,
as the interest expense on the Yorkville loan was disallowed in
the notice of deficiency, petitioners bear the burden of
establishing that respondent's determination was erroneous. Rule
142(a).
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