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b. Huntington Mortgage Co. Loan to WRI
On August 21, 1984, WRI obtained a $2.5 million construction
loan from Huntington Mortgage Co. (HMC). The loan was secured by
a mortgage (the HMC mortgage) on the improved land. Wise and
Eicher personally guaranteed the HMC loan. WRI made payments on
the HMC loan to HMC. WRI did not default on the HMC loan from
1984 to 1990. The loan was renewed five times and remained
payable to HMC by WRI.
c. The Hersco Mortgage
The Hersco mortgage was subordinated to the HMC mortgage.
WRI made no payments in cash or property on the Hersco mortgage
from 1984 to 1990. At all times relevant, WRI did not have
enough funds to make principal and interest payments on the
Hersco mortgage. Journal entries were made in the books and
records of WRI and Hersco, stating that there had been payment
and simultaneous “loan backs” to WRI. No evidence regarding the
terms of "loan backs" was offered. WRI claimed a $100,138
interest deduction relating to the Hersco mortgage for its fiscal
year 1988. Hersco never sued WRI to collect mortgage payments.
2. The Westfield Mortgage
On December 12, 1986, Westfield Financial Corp. (Westfield)
lent $1.1 million to Intent. The loan was secured by a mortgage
on land owned by Intent in Pasco County, Florida. Wise and
Eicher guaranteed the loan. On December 16, 1986, Intent
disbursed $797,344 of the Westfield loan to WRI in exchange for a
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