Security State Bank - Page 3

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          be referred to as category X loans.  Petitioner held the category           
          X loans on December 31, 1989.  During 1989, petitioner also made            
          some loans that were documented by promissory notes with a stated           
          maturity date that was less than 1 year from the date the notes             
          were issued.  Such loans will be referred to as category Y loans.           
          Petitioner held the category Y loans on December 31, 1989.  The             
          interest and principal payable on all categories X and Y loans              
          were due at maturity.                                                       
               Petitioner reported its taxable income using the cash method           
          of accounting.  Petitioner reported interest income from its                
          categories X and Y loans as it was received pursuant to the cash            
          method of accounting.                                                       
               Petitioner had interest income of $60,086.89 during 1989               
          that had accrued, but was not yet paid, on its category X loans.            
          Petitioner had interest income of $65,687.11 during 1989 that had           
          accrued, but was not yet paid, on its category Y loans.                     

                                     Discussion                                       

               Petitioner uses the cash method of accounting to report its            
          taxable income.  Consistent with that method, it did not report             
          as income on its 1989 return any accrued interest or original               
          issue discount that was earned but unpaid at the end of 1989.               
          Respondent does not contest petitioner's general use of the cash            








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