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American National account on December 30, 1980. On December 31,
1980, White Tail made a wire transfer of $1,595,017.96 to John
Hancock, representing $7,707.50 of principal and $1,587,310.46 in
interest due under the 1980 credit arrangement.6
The purpose of the $1,587,310.46 advance from John Hancock
was to provide White Tail with sufficient funds to satisfy the
interest due John Hancock on January 1, 1981, under the terms of
the 1980 credit arrangement, as modified. White Tail's general
ledger showed that its bank account at American National, as of
December 31, 1980, was overdrawn with a negative balance of
$138,931.80.7
On their 1980 Federal income tax return, petitioners
reported an ordinary loss of $946,613 as their distributive share
of the $2,839,839.09 ordinary loss reported by White Tail on its
U.S. Partnership Return of Income (Form 1065) for 1980. On June
6, 1994, respondent issued a notice of deficiency adjusting
petitioners' distributive share of the ordinary loss reported by
White Tail.8 In particular, respondent disallowed the interest
6There is no explanation of why the $7,707.50 principal
payment was not deferred in accordance with the modification of
the 1980 credit arrangement.
7This amount includes outstanding checks that had been
written on, but had not yet cleared, White Tail's American
National account. This amount is also shown as a liability on
White Tail's 1980 U.S. Partnership Return of Income (Form 1065).
8Respondent also adjusted petitioners' medical expense
deduction for 1980 in the amount of $10,029 and their investment
(continued...)
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