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I. The MacCoon Note
FINDINGS OF FACT
Petitioners Thomas A. and Maria M. Hagman, husband and wife,
resided in Thousand Oaks, California, at the time their petition
was filed. Maria M. Hagman is a petitioner in this case because
she joined in filing Federal income tax returns with Thomas A.
Hagman (Mr. Hagman). Subsequent references to “petitioner” refer
only to Mr. Hagman. Petitioners’ 1988 and 1989 Federal income
tax returns were filed on February 3, 1993, and September 30,
1993, respectively.
Mr. Hagman was employed as a bank manager for 13 years. In
1974, he left banking to pursue a career investing in real
estate. In 1978, petitioner became aware of an opportunity to
buy a 16-acre parcel of real estate within the city limits of
Thousand Oaks, California. The parcel was available for sale
only if the seller could also sell the adjacent property.
Petitioner lent $65,000 to Grant MacCoon (Mr. MacCoon) for the
purpose of purchasing the adjacent parcel. Petitioner and Mr.
MacCoon had an agreement that petitioner would receive 25 percent
of Mr. MacCoon’s profits on the sale of the adjacent land. Mr.
MacCoon gave petitioner a 10-year unsecured note, bearing 7
percent interest. The interest and principal were payable at
maturity.
In 1979, Mr. MacCoon made a $5,000 principal payment on the
note, reducing the amount of the note to $60,000. The following
year, Mr. MacCoon sold the property for a $400,000 profit but did
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