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inventory. Thus, petitioner could reasonably expect to see
losses surface during this market slowdown. After learning
about Northwest's financial setbacks, Franklin and Wilcox
traveled to Coeur d'Alene, Idaho, to assess the situation at
Northwest. After observing some of the fundamental problems at
Northwest, Wilcox returned to Northwest in November 1988 and
placed supervisory and financial controls on Northwest's
operations. Petitioner obtained additional collateral from
Nicholson, patent rights, and his Northwest stock, and petitioner
sent Clark to Coeur d'Alene so that she could manage the business
side of Northwest.
We find petitioner's response reasonable especially in light
of the fact that petitioner exerted no management or financial
controls over Northwest prior to the fall of 1988. Petitioner's
officers decided to assist a dealership that provided an outlet
for petitioner's products in a profitable region. Petitioner
provided loans to Northwest and applied financial and management
controls over Northwest's operations when additional problems
surfaced. Petitioner engaged Axley & Rode for advice and
assistance in evaluating Northwest's financial condition. Given
Northwest's success prior to the market slowdown in the spring of
1988, petitioner reasonably could conclude that Northwest would
be able to pay the amounts advanced. See Baldwin v.
Commissioner, T.C. Memo. 1993-433. Petitioner properly deducted
the disputed amounts as bad debts.
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