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made the decision not to leave Stanford to fulfill his service
obligation because he believed to do so would affect his standing
in the program. DHHS thereafter regarded him as in default and
liable to the United States for repayment of the scholarship
money plus damages pursuant to a treble damages clause in the
contract. Health Professional Educational Assistance Act of
1976, Pub. L. 94-484, sec. 408(b)(1), 90 Stat. 2243, 2286, 42
U.S.C. sec. 254o(b)(1) (Supp. IV, 1981).
Petitioner, believing he was not in default, filed a civil
suit in the United States District Court for the District of
Columbia against the Secretary of DHHS in Keane v. Bowen, Civil
Action No. 86-02574-SS.
In October 1987, petitioner reached a settlement with DHHS,
and the case was dismissed. Under the terms of the agreement, a
promissory note was executed whereby petitioner agreed to pay
$125,000 to DHHS representing the $45,805 in original principal
and $79,195 in previously accrued interest. Additional interest
on the unpaid balance was also due at the rate of 7.22 percent
per annum.
In taxable years 1991, 1992, and 1993, petitioners claimed
Schedule C business deductions for the interest paid on the
promissory note in the amounts of $7,249, $5,220, and $5,409,
respectively. Respondent disallowed these deductions on the
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