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Appolo for the Four A debt, and Appolo would not be required to
establish a reserve against the Four A debt.
On or about May 13, 1991, petitioners executed two guaranty
agreements. Both guaranties stated that they were supported by
adequate and sufficient consideration. The first guaranty
covered all loans made by Appolo to Four A in the past and to be
made in the future. The first guaranty stated that it was given
for good and valuable consideration and "as consideration for
Appolo not demanding immediate payment of its existing loans to
Four A and as an inducement to Appolo to make future advances to
Four A".
At the time of Four A's bankruptcy in 1993, Four A owed
$1,106,000 to Appolo. In 1993, Appolo wrote off the Four A debt
as a business bad debt under section 166 without ever demanding
payment from either Four A or the Four A shareholders. As a
result, on their respective 1993 Federal income tax returns, G.
Asher and L. Asher each reported an ordinary loss of $80,246 as
their distributive share of Appolo's bad debt deduction. During
1993, the Four A shareholders had the financial ability to honor
the guaranties, and they currently still have such ability.
OPINION
I. Basis in Four A Stock
Petitioners argue that they are entitled to increase their
bases of their Four A stock as a result of Four A's 1993
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