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claimed interest expense. The notice stated, in part, as
follows:
It is determined that the claimed interest expense
deduction of $368,227 in 1986 is not allowed because
you have not established:
(1) that there was a valid indebtedness;
(2) if there was a valid indebtedness, that the
indebtedness was yours; or
(3) that you actually paid any interest.
During the course of the trial, petitioners began offering
evidence with respect to the claimed deductions and expenses.
Counsel for the parties then requested and received a recess in
order to meet and discuss off the record the various evidentiary
and legal matters pertaining to the deductions and expenses. The
Court did not participate in counsel's deliberations.
Immediately following their conference, counsel for the
parties advised the Court on the record that the Schedule A and
Schedule C claimed deductions and expenses had been
substantiated, except that respondent disputed that the expenses
paid out of funds from the Administration Co. and Principal
Services accounts had been paid by Kanter and questioned whether
the Kanters were entitled to deduct expenses with respect to
property held in trust. Counsel did not specifically mention
whether their agreement included the 1986 interest deduction.
However, counsel for petitioners expressed to the Court their
belief that the parties had narrowed the issues on all of the
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