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executed a promissory note in favor of FNB in the amount of
$927,862.21 for the stated purposes of paying off a farm loan at
Second National Bank of Danville and for farm operating expenses.
Petitioner and his spouse pledged the following as
collateral for the promissory note executed in favor of FNB, on
August 4, 1983: (1) Assignment of beneficial interest in the FNB
land trust agreements Nos. 5179 and 5180; (2) real estate
mortgages on 1,300 acres of Indiana land; (3) loan agreements
dated August 1 and 4, 1983; (4) security agreement dated August
4, 1983, on machinery and crops; and (5) continuing guaranty of
petitioner and his spouse and their daughter and son-in-law.
Petitioner and his spouse defaulted on the promissory note
to FNB. As a result of petitioner and his spouse's default in
1986 FNB commenced a foreclosure sale of the assets that were
pledged to guarantee the promissory note.
On July 3, 1986, petitioner and his spouse and a
representative of FHA executed form FmHA 465-1, Application for
Partial Release, Subordination, or Consent, wherein there is a
partial release of 656 acres of petitioner and his spouse's
Illinois farmland. Approximately 652 acres of petitioner and his
spouse's 1,120 acres of Illinois farmland were sold in a
foreclosure sale in 1986. Petitioner's basis in the 1,120 acres
of Illinois farmland was $342,000. The proceeds from the
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