Thomas F. and Therese Grojean - Page 9

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          in the amounts of $31,875, $131,425, and $114,675, respectively.             
          For the same years, American debited interest payments due from              
          petitioner under the Grojean note and the Grojean credit note                
          from petitioner’s checking account for identical amounts, with               
          the net effect to petitioner for all years being a wash.                     
               As a condition of receiving their loans, Schanno, Schanno               
          Acquisition, and petitioner were required to give American annual            
          financial statements of Schanno that were audited and certified              
          by an independent accounting firm.  In the certified financial               
          statements that were prepared by the accounting firm for 1989,               
          1990, and 1991, Schanno reported that petitioner’s participation             
          interest was a $1.2-million guaranty of the corporation's $8.4               
          million loan and $2.6 million revolving credit loan.                         
               On his 1989, 1990, and 1991 Federal income tax returns,                 
          petitioner claimed passthrough ordinary losses from Schanno in               
          the amounts of $1,186,375, $9,389, and $28,273, respectively.                
          Petitioners also claimed petitioner’s share of a net operating               
          loss carryforward from Schanno from 1989 to 1990 in the amount of            
          $591,245.  In applying the basis limitation under section                    
          1366(d), he included in his basis $1.2 million representing his              
          participation interests in the Schanno note and the credit note.             
          Respondent disallowed the inclusion of that amount in                        
          petitioner’s basis computation and determined that petitioner did            
          not have sufficient basis in his Schanno stock to allow for the              

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