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there is no evidence that any interest was ever paid.10 In
addition, the rate of interest on the notes did not change,
although quoted interest rates were changing during the 3-year
period when the notes purported to be outstanding. This is not
evidence of normal business practice.
There are no source documents evidencing a loan. Both
petitioner and his accountant referred to internal accounting
records and work papers when asked how each of the 16 loan
balances was calculated. Petitioner never offered these internal
accounting documents into evidence. Petitioner stated that these
records were available but that he would have to find them.
Petitioners never produced them.
There are many inconsistencies between the categories and
amounts shown on the Schedules L that petitioner said reflected
the loan balances outstanding at yearend between him and the
corporations and the face amounts of the corporations' notes to
him. The corporate Schedules L do not show significant loans
from stockholders. GAPS showed no loans from stockholders as of
10GAPS claimed an interest deduction of $30,632 on its 1989
pro forma tax return. Respondent disallowed this entire amount,
and GAPS has conceded this issue. Even if this interest was
paid, there is no evidence that it was paid to petitioner for
these purported loans. Even if the interest was paid to
petitioner for these purported loans, petitioners did not report
these payments as ordinary income. If the deduction was based
upon an accrual of interest payable to petitioner, the deduction
would properly be disallowed under sec. 267(a)(2) by reason of
the relationship between petitioner and GAPS, as defined in sec.
267(b)(2).
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