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Petitioner owned 12 percent of Seaway's capital stock from
the company's inception until its termination in 1984.
To ensure payment of Seaway's long-term debt, its
stockholders executed a Throughput and Deficiency Agreement
(TDA) dated February 12, 1975. Under the terms of the TDA,
each stockholder agreed to deliver sufficient crude oil for
transportation through the pipeline, in proportion to its
capital stock ownership, so that revenues collected for the
transportation would pay all operating expenses of the
pipeline and all principal and interest due on Seaway’s
outstanding debt. In the event Seaway experienced a cash
deficiency, the TDA obligated each shareholder to pay
Seaway its proportionate share of the deficiency on the
date any interest or principal payment was due, or at the
end of any 6-month accounting period. Seaway and its
shareholders treated these TDA deficiency payments as
prepaid transportation charges, to be credited against
actual charges when crude oil was transported for the
paying shareholder. On its balance sheet, petitioner
credited its TDA deficiency payments to an account for
prepaid expense items and debited the payments to an
expense account when it actually used the pipeline.
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