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in a Minnesota general partnership, M & O Farms. M & O Farms was
in the business of growing potatoes. M & O Farms' annual
accounting period was a fiscal year ending on October 31, and it
used the cash method of accounting. Ronald Offut owned Offut Co.
and was part owner of a business called Chef-Reddy Foods (Chef-
Reddy), a food processing business that made frozen french fries.
During its 1983 fiscal year, M & O Farms sold potatoes
valued at $1,172,790 to Chef-Reddy. The potatoes were sold on
credit, and M & O Farms treated the amount due as an account
receivable (the account receivable). M & O Farms never received
payment for the potatoes; M & O Farms distributed the account
receivable to its partners.
Petitioners reported nothing with respect to the account
receivable on either their 1983 or 1984 income tax return.
Petitioners have failed to prove that they have ever reported
anything with respect to the account receivable.
By agreement executed February 14, 1989 (the purchase
agreement), Larry Monico and Offut Co. agreed that Offut Co.
would purchase Larry Monico's interest in M & O Farms. Under the
heading "Other Matters", the purchase agreement recites:
It is hereby agreed that Offutt [Chef-Reddy] owes
Monico Five Hundred Eighty-six Thousand Dollars
($586,000), which debt is unrelated to the purchase of
the Partnership interest described herein. A note will
be signed by Offutt in favor of Monico for that sum at
closing which will provide for the payment of interest
at the rate of ten percent (10%) per annum commencing
as of July 1, 1987, with the term of said note to be
five (5) years from the date of closing with interest
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