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After initial contact with owners of the Ranch regarding its
possible purchase, petitioner, at the owners' request, conducted
all discussions regarding purchase of the Ranch with a
representative of First City National Bank of Hobbs, New Mexico
(later known and hereinafter referred to as Moncor Bank). Moncor
Bank held a perfected security interest in the Ranch as a result
of a loan made to the owners of the Ranch. Moncor Bank's
security interest, however, was subordinate to those of two other
banks which also had made loans to the owners of the Ranch and
which had perfected security interests in the Ranch as collateral
for their loans. The owners of the Ranch had filed petitions in
the U.S. Bankruptcy Court for the District of New Mexico under
chapter 11, and Moncor Bank, as a secured creditor, was assisting
the owners in selling the Ranch in lieu of foreclosure.
On September 1, 1983, after 6 months of negotiations with
representatives of Moncor Bank, petitioners agreed to purchase
the Ranch for a stated purchase price of $1 million, to be
financed 100 percent by a loan from Moncor Bank (Bank loan).
Petitioners executed in favor of Moncor Bank a promissory note
with a stated total principal amount of $1 million, nominally
payable in 14 annual installments, with interest at 12 percent
per annum, and a final payment stated to be due on September 1,
1998.
On September 1, 1983, Moncor Bank paid $760,000 of the
stated $1 million loan proceeds to the two other banks which held
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