Joseph P. and Marilyn Schneller - Page 7

          both before and after the writeoff of the 12 accounts.  Before the                 
          writeoff neither petitioners nor their corporation gave any                        
          indication that the accounts would not be repaid.  Since the date                  
          of the writeoff, Delivery has made no demands for repayment of the                 
          account balances involved, nor has Delivery in any other way                       
          asserted that petitioners still owe the balances. Nor have                         
          petitioners in any way indicated that they still consider                          
          themselves indebted to the corporation for those balances.                         
                On Delivery's 1990 tax return (filed under the name KTM,                     
          Inc.), the $527,428 writeoff is characterized as the writeoff of                   
          previous dividends.  Delivery's accountant (Mr. Arthur) knew that                  
          only $51,065 had been taxed as dividend income to petitioners                      
          during the audit of years 1982 through 1984.  Mr. Arthur also knew                 
          that interest had been imputed on the remaining loan balances.  And                
          he was aware that characterizing the amounts as dividend income was                
          advantageous to petitioners.  The purported dividend income                        
          involved years now closed by the statute of limitations.                           
                Preliminarily, we note that petitioners claim that                           
          respondent’s notice of deficiency is invalid because it was based                  
          solely on the revenue agent’s arbitrary conclusion that the amounts                
          written off should not go untaxed.  We find this argument to be                    
          without merit.  The revenue agent credibly testified that he had                   
          sufficient evidence concerning the distributions at issue to make                  
          his determination.  Petitioners offered no evidence to contradict                  

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