- 5 -
By December of 1987, Stone Jessup's debt to the bank
exceeded $400,000. Notes evidencing the debt were due and had to
be paid or refinanced. Because of Stone Jessup's financial
situation at the time, the bank was unwilling to renew Stone
Jessup's loans or grant the corporation further extensions of
credit unless: (1) Petitioner assumed personal liability for any
existing or future debt by acting as a comaker with Stone Jessup
on various debt instruments; (2) petitioners agreed to
collateralize the debt by placing a mortgage on their residence
in favor of the bank; (3) certain stock owned by petitioner was
pledged to the bank; and (4) petitioner obtained, at his expense,
certain minimum levels of credit life insurance naming the bank
as beneficiary. Beginning in 1988, Stone Jessup's and
petitioner's credit arrangements with the bank were restructured
in accordance with the above terms.
On a Schedule A filed with their 1991 return, petitioners
claimed a miscellaneous itemized deduction in the amount of
$41,906.55 for interest payments made to the bank during that
year on account of loans made under the above-discussed credit
arrangements. Of the amount deducted, $41,496.98 was "paid" to
the bank by notes co-made by Stone Jessup and petitioner (the
relevant notes were signed by petitioner, individually, and in
his capacity as president of Stone Jessup), and $409.57 was paid
directly to the bank on petitioner's behalf as a gift from
petitioner's father, who was a director of the bank. In
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Next
Last modified: May 25, 2011