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petitioner had previously accrued as income as part of the total
$5,136,000 contract price under the cost-plus contract with
Clinch River. This adjustment was reflected as a further debit
(or reduction) of $340,148 in accrued income and as a credit (or
decrease) of $340,148 in petitioner's accounts receivable with
respect to Clinch River.
Lastly, as a further yearend closing adjustment on its books
and records with regard to its contract with Clinch River,
petitioner "wrote-down" the original $5,136,000 contract price by
an additional $600,000 to reflect what petitioner perceived as
the unlikelihood of receiving any further payments under the
November 1988 and February 1989 contracts with Clinch River that
were dependent on profitability and production of the mill. This
adjustment was reflected by a $600,000 debit (or increase) to a
bad debt expense account and by a $600,000 credit (or decrease)
to petitioner's accounts receivable with respect to Clinch River.
On July 11, 1989, petitioner filed suit against Clinch River
in the Chancery Court for Roane County, Tennessee, seeking to
recover $1,956,000 (the balance due under the original October
1987 contract between Clinch River and petitioner) with respect
to its renovation of the paper mill.
On April 9, 1990, Clinch River filed for chapter 11
bankruptcy in the U.S. Bankruptcy Court (Bankruptcy Court) for
the Southern District of Ohio. As of the date of trial, Clinch
River was operating under a plan of reorganization that was
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