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promissory note provided for fixed interest and was secured by
certain UI computer software.
On December 27, 1989, UI obtained a secured loan from the
City of Orem, Utah, in the principal amount of $80,000, with
repayment of principal and interest at 8.5 percent due over 36
months. Petitioners subordinated the 1989 promissory note to the
City of Orem’s secured loan. At least through July 31, 1990, UI
made payments to the City of Orem on the $80,000 loan.
During 1990, UI began to experience financial difficulty
largely caused by UI’s inability to sell its new computer
software products.
On December 21, 1990, 10 days prior to the maturity date of
the 1989 promissory note, UI notified petitioners that it would
not be able to pay the $184,874 principal balance reflected on
UI’s accountant’s ledger with regard to the 1989 promissory note.
At no time did petitioners take any legal action to collect the
$184,874 from UI.
On December 30, 1990, following advice of their tax return
preparer and in an attempt to qualify their investment in UI as a
section 1244 ordinary loss for 1990, petitioners caused UI to
issue additional stock in the name of the family trust in
exchange for the $184,874 that allegedly was owed to petitioners
or the family trust under the 1989 promissory note.
On July 2, 1991, petitioner in writing urged UI’s creditors
to accept a plan that would restructure UI’s debt obligations.
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