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February 1989 contract. The $340,148 that Clinch River owed
suppliers and subcontractors under the February 1989 contract was
never paid, and petitioner never received any payments under the
provisions of the November 1988 contract that were dependent on
the mill's profitability and production.
By February 28, 1989, several priority deeds of trust had
been filed in Tennessee by other creditors against Clinch River
and perfected against the mill and other property of Clinch River
in the total amount of $4,469,999.
On March 19, 1989, yearend closing adjustments were made on
petitioner's books and records with respect to petitioner's
taxable year ending February 28, 1989, reflecting a reduction in
the contract price for petitioner's renovation of the mill from
the original $5,136,000 to $4,500,000. On petitioner's books and
records, petitioner recorded this adjustment as a debit (or
reduction) of $636,000 in accrued income and as a credit (or
decrease) of $636,000 in petitioner's accounts receivable with
respect to Clinch River ($5,136,000 less $4,500,000 (maximum
amount that petitioner would receive under the November 1988
contract on sale of the mill) equals $636,000).
Petitioner also made a yearend closing adjustment on its
books and records with respect to petitioner's taxable year
ending February 28, 1989, to reflect the $340,148 that petitioner
would not receive because Clinch River had agreed to pay the
$340,148 directly to suppliers and subcontractors but that
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