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Before the Board forgave the $5 million amount, but after
the Crash, petitioner had made a formal demand upon Kenilworth to
repay all moneys that it owed petitioner (including the
advances). Kenilworth was unable to honor this demand. Before
the Crash, Kenilworth had honored all of its obligations to
petitioner, and petitioner had always transferred money to or for
the benefit of Kenilworth with the belief that it would repay
petitioner in full.
Following the Crash, Kenilworth's primary asset was a piece
of real estate. Petitioner continued to transfer money to
Kenilworth for its trading operation, and Kenilworth continued to
make timely payments on a debt that encumbered the real estate.
On September 12, 1988, Kenilworth sold the real estate for
$481,554, and it paid petitioner the largest portion of the sales
proceeds. The amount paid did not reduce the amount considered
owed below $5 million.
For its 1985 through 1988 taxable years, Kenilworth reported
pre-NOL and pre-special deduction taxable income (loss) on its
Federal income tax returns equal to ($1,323), $234,590,
($6,943,436), and ($4,038,323), respectively. It reported the
following "gross receipts" and "cost of goods sold":
Taxable Year Gross receipts Cost of goods
1985 $86,736,153 $86,068,552
1986 249,750,510 247,641,780
1987 193,311,229 201,493,250
1988 200,329,220 202,253,502
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