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March 24, 1988, petitioner received no salary or dividends from
Associates.
Soon after its organization, Associates obtained from United
Virginia Bank (bank), later known as Crestar Bank, a $150,000
line of credit that funded Associates' operations. The line was
secured by three certificates of deposit, two of which, in the
aggregate amount of $130,000, were in the name of petitioner, and
one of which, in the amount of $20,000, was in the name of
petitioner's wife. During January 1981, the bank called the
line, and the certificates of deposit in petitioner's name were
redeemed during that month and used to satisfy the indebtedness
(sometimes hereafter referred to as the 1981 transaction). The
amount of those certificates exceeded Associates' indebtedness to
the bank by a few thousand dollars, and petitioner retained that
excess. The certificate in the name of petitioner's wife was not
used to pay Associates' debt. Associates did not obtain another
line of credit. At that time, petitioner did not desire to
continue building houses because the housing market was not
strong and interest rates were between 18 and 19 percent.
Petitioner's attorney drew up an unsecured demand note
(note) that bore no interest. The note was made on those terms
because petitioner did not know when improved business conditions
would enable Associates to resume operations. The note was among
items that were subsequently lost in a flood. Associates' assets
at the time that the note was drawn up included building lots and
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