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participating interest in the Schanno note to $1 million. At the
same time, petitioner signed a $200,000 revolving credit note
(Grojean credit note), keeping the total amount he received in
the form of a loan at $1.2 million. Petitioner then purchased a
$200,000-participation interest in the credit note. Petitioner
and American amended the participation agreement to reflect this
purchase.2 The Grojean credit note had the same interest rate
and other terms as the credit note, and petitioner became
entitled to payments for his participation interest only when
American received payments under the credit note. American's
share of the credit note was superior to petitioner’s $200,000
share. American and petitioner amended other related documents
as well to incorporate these changes, including the loan
agreement and the stock pledge and security agreement. American
had sole and absolute discretion to exercise any rights under the
credit note, without advice or consent from petitioner. American
debited and credited interest payments to and from petitioner’s
checking account under the credit note and the Grojean credit
note as Schanno paid the amounts due under the Schanno note and
the credit note.
For 1989, 1990, and 1991, American credited petitioner’s
checking account with interest income relating to his
participation interests in the Schanno note and the credit note
2The record does not indicate whether American issued a
participation certificate to petitioner for his interest in the
credit note.
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