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advances began. We also find that this debtor-creditor
relationship continued--with a reasonable expectation of
repayment based on Mark Mann's actual and potential employment
with petitioner, and on Mark's employment with the Ross Bros.
firm--until the end of petitioner's tax year ended July 31, 1991.
Accordingly, we find that advances made and interest accrued
prior to (or on) July 31, 1991, were bona fide debt.
In or around July 1991, however, Mark Mann sought credit
counseling, and the counseling service recommended bankruptcy.
In September 1991, Mark became unemployed, and he remained
unemployed throughout 1992. As a result of this unemployment,
during petitioner's tax year ended July 31, 1992, Mark Mann was
no longer able to meet his obligations as they came due.
Moreover, in March 1992 petitioner decided to discontinue, and
sold the assets of, its Government contracting business, in which
Mark had worked. Finally, it is clear that on July 21, 1992,
Mark's liabilities to parties other than petitioner significantly
exceeded his assets.
For all these reasons, we find that during petitioner's tax
year ended July 31, 1992, Mark Mann's financial situation had
deteriorated to such an extent that petitioner no longer had a
reasonable expectation of repayment. We therefore find, on the
basis of all the facts and circumstances, that petitioner and
Mark Mann could not have intended to create, and did not create,
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