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In December of 1992, Partrick made a loan to Peoplefeeders
of approximately $600,000 with an interest rate of 4 percent over
prime. The principal amount of this loan was payable on demand.
This loan from Partrick to Peoplefeeders was approved in advance
by a resolution of Peoplefeeders' board of directors, evidenced
by a promissory note, and secured by Peoplefeeders' assets.
Petitioner's Income Tax Returns and Respondent's Audit
For each of its taxable years, Peoplefeeders, Square Pan,
and Square Pan’s subsidiaries filed consolidated corporate
Federal income tax returns. On petitioner’s 1992 consolidated
corporate Federal income tax return, the $3,751,930 difference
between Peoplefeeders’ total cash receipts and the total expenses
and loan payments paid out of the Intercompany bank account on
behalf of Peoplefeeders was reflected on the balance sheet
attached to the 1992 tax return as an intercompany receivable but
also as an adjustment or a reduction to Peoplefeeders' equity
investment in its subsidiaries.
On petitioner's 1992 consolidated corporate Federal income
tax return, Square Pan claimed a $3,751,930 bad debt deduction
relating to the alleged cancellation of the purported $3,751,930
debt obligation owed by Peoplefeeders to Square Pan.3 On its
3 For 1992, under sec. 1.1502-14(d), Income Tax Regs., bad
debt deductions were allowed upon cancellation of worthless debt
obligations between affiliated corporate entities even though
such entities filed consolidated Federal corporate income tax
returns. This regulation was generally effective for bad debt
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