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regardless of whether there was a prearranged understanding,
Mr. Kersting and program participants never contemplated that the
principal obligation on a primary loan would be paid except by a
surrender of the stock. In so holding, Judge Goffe found it
significant that: (1) No evidence was produced of a primary
note ending up in the hands of anyone not associated with
Mr. Kersting; (2) primary loans issued during later years
included an express notation that they were nonnegotiable and
nonassignable; and (3) primary loans were unsecured, with the
primary notes failing to list even the purchased stock as
collateral.
In completing his analysis, Judge Goffe found further
support for his holding that the primary loans did not constitute
genuine debt by virtue of Mr. Kersting's waltz of primary loan
funds underlying the stock subscription plan, the apparent waltz
of funds under the stock purchase plan and the leasing
corporation plan, and Mr. Kersting's practice of backdating
documents relating to the loans.
In the alternative, Judge Goffe found that, even assuming
that the test case petitioners had established that the primary
loans represented genuine debt, the test case petitioners had
nevertheless failed to show that they actually paid primary loan
interest within the meaning of section 163(a). Specifically,
Judge Goffe concluded that the test case petitioners had not paid
primary loan interest by virtue of Mr. Kersting's waltz of
leverage loan funds (the funds used to pay primary loan interest)
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