Charles H. Davison and Leslie B. Davison - Page 25

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          borrowed from John Hancock, in order to prevent a default on the            
          interest obligation.  In the Letter Agreement between White Tail            
          and John Hancock, both borrower and lender agreed that the                  
          $1,587,310.46 advance would increase White Tail's loan and that             
          it would be used to satisfy the current interest obligation.                
          Checks were exchanged within a 2-day period to effect the                   
          transaction.  The effect was to increase the amount of White                
          Tail's principal loan obligation to John Hancock by the amount of           
          interest due.  The fact that the loan proceeds were run through             
          White Tail's bank account does not affect the substance of the              
          transaction.  Wilkerson v. Commissioner, 655 F.2d at 983.  It               
          follows that White Tail, a cash basis partnership, is not                   
          entitled to a deduction for interest paid.                                  
               The other transaction in issue also involves a situation               
          where an interest obligation was satisfied by borrowing funds               
          from the original lender.  On May 7, 1980, following the                    
          establishment of the 1980 credit arrangement, John Hancock                  
          advanced $19,645,000 to White Tail.  Of this amount, John Hancock           
          applied $227,647.22 to unpaid interest owed under the terms of a            
          previous loan to White Tail.  John Hancock did this by crediting            
          White Tail's prior loan account to show that White Tail's                   
          interest obligation in the amount of $227,647.22 had been                   
          satisfied.  John Hancock simultaneously increased the principal             
          amount due from White Tail under the new 1980 credit arrangement.           






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