Bill L. and Patricia M. Spencer - Page 12

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               The S/B note was revised on or about February 1, 1990, and             
          the repayment period was extended from 10 years to 15 years.                
          SPC-SC then commenced payments to SSI during April 1990, but                
          ceased payments during August 1991, when it began experiencing              
          cash-flow problems.  No payments were made for the next 5 months,           
          from September 1991 through January 1992.  The S/B note was again           
          revised on or about December 1, 1992, when the interest rate was            
          reduced from 8 percent to 6.5 percent.                                      
          Information Reported by SPC-SC and Mr. Spencer                              
               SPC-SC did not report interest income on its Federal income            
          tax returns for taxable years 1991 and 1992.  SPC-SC, however,              
          deducted the interest it paid to both SCNB and SSI, and interest            
          expense was among the operating expenses that SPC-SC used in                
          arriving at its net operating loss that ultimately passed through           
          to the SPC-SC shareholders.11   On their Federal income tax                 
          returns, the Spencers claimed the following amounts as Mr.                  
          Spencer's share of losses from SPC-SC:                                      
                         Year      Amount of Loss Claimed                             
                         1990           $17,741                                       
                         1991           15,031                                        
                         1992           37,673                                        
          SPC-SC issued no Forms 1099 to report interest paid to its                  
          shareholders.  On their individual Federal income tax returns,              

          11   Mr. Spencer signed SPC-SC's Federal income tax returns for             
          all of the years in issue in the instant case.                              

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