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On January 15, 1989, Clinch River failed to make the
$400,000 payment due petitioner on that date under the November
1988 contract.
On February 2, 1989, petitioner and Clinch River
renegotiated in writing certain aspects of the November 1988
contract (February 1989 contract). Under the February 1989
contract, in lieu of the $400,000 that was due petitioner on
January 15, 1989 (under the November 1988 contract), Clinch River
agreed to pay directly to various suppliers and subcontractors
$340,148 that was owed by petitioner to the suppliers and
subcontractors for their work on the mill renovation, and Clinch
River agreed to pay petitioner only the $59,852 balance of the
$400,000 that was scheduled to be paid on January 15, 1989
($400,000 less $340,148 equals $59,852). Under the February 1989
contract, the two other provisions of the November 1988 contract
that made additional payments from Clinch River to petitioner
contingent upon Clinch River's profitability and production
remained in effect. The provisions of the November 1988 contract
relating to a possible sale of the paper mill are not mentioned
in the February 1989 contract.
From the time of initial startup of the mill in July of 1988
through the end of petitioner's 1989 taxable year, Clinch River's
financial statements reflected a total net operating loss of
$4,340,926 and no profit from operation of the mill. Petitioner
received copies of Clinch River's monthly financial statements
from July of 1988 through the end of Clinch River’s fiscal year
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