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On its Federal income tax returns and amended returns, the
corporation claimed deductions for compensation payments to
petitioner as follows:
Taxable Year Ending Original Return Amended Return
June 30, 1986 $446,781 no change
June 30, 1987 379,694 $364,694
Dec. 31, 1987 49,782 181,718
Dec. 31, 1988 430,002 no amended return filed
On their Federal income tax returns and amended return,
petitioners included in their gross income compensation payments
from the corporation as follows:
Taxable Year Original Return Amended Return
1986 $446,781 $253,167
1987 344,316 no amended return filed
1988 430,002 no amended return filed
During 1988, petitioner sold a rental building in Yorkville,
Illinois (the Yorkville building). Petitioner was personally
liable for a loan secured by the Yorkville building (the
Yorkville loan). At the time of the sale, the interest on the
Yorkville loan was in arrears. On their 1988 Federal income tax
return, petitioners reported gain on the sale of the Yorkville
building and claimed on their Schedule E an interest expense on
the Yorkville loan in the amount of $74,723. In the notice of
deficiency, respondent determined a loss on the sale of the
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