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paid approximately $50,000 in cash as a downpayment; the rest of
the purchase price was reflected in a note held by Howard (the
Action note). Petitioner assumed personal liability as guarantor
for the Action note, which was restructured a short time later to
reduce the amount of the payments National was required to make.
The money used to acquire Action came from the advances made by
petitioner and the others. The purchase of Action was
contemplated by National's shareholders at the time of their
advances and in part prompted them to make the advances, as did
the need to meet basic operating costs.
National never made a payment of principal or interest on
the Fries note. Petitioner never requested repayment or granted
a deferment on the note. Petitioner could not by his own efforts
repay the obligation of National to himself since all checks
issued by National required two signatures. However, National
did make periodic payments on the Action note, and petitioner
signed those checks with another officer even after National had
defaulted on his own note. From 1987 to 1990, National paid
approximately $100,000 on the Action note before defaulting on
that obligation as well.
National's failure to pay on the Fries note effected a
difficult financial situation for petitioners. In May 1988, they
were forced to sell their house. In 1989, in order to make ends
meet, petitioner stepped down as president of National, which by
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Last modified: May 25, 2011