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promissory note, Guerra advised petitioner that it should be in
writing and should reflect a market rate of interest.
The transfer of the Ranch from Paz to petitioner was
accomplished by warranty deed on July 2, 1990. Petitioner did
not execute a promissory note at the time of the transfer.
After the Transfer
In the period of July through September 1991, Michelle
Youngs (Youngs), also of Davidson, Eagleson, began preparing
Paz's books for 1990 and Paz's 1990 tax return. She came upon
the notes that Kuntz had written in 1990 with respect to the
transfer of the ranch. This was the first she learned of the
transfer. She asked Eagleson whether she needed to book the
transfer and whether it in fact had taken place. He confirmed
that the transfer had occurred, so Youngs made accounting
adjustment entries to reflect the sale of the Ranch to
petitioner. Youngs recorded the transfer on Paz's books as a
note receivable from shareholder in the amount of $154,007, the
book value of the Ranch prior to the transfer. In addition,
Youngs prepared Paz's 1990 tax return, on which Paz reported the
$154,007 amount as a loan to shareholder and the transfer as a
sale of a capital asset.
At the time of the transfer of the Ranch, petitioner was
married to Linda Glass Sweatman. In June 1991, as part of their
divorce agreement, Linda Glass Sweatman conveyed her interest in
the Ranch to petitioner.
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