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and, in case of default, would pay reasonable legal and other
expenses relating to collection proceedings.
In October 1990, John defaulted on the note, and in November
1990, Louise filed a collection suit in the Superior Court of
Mecklenburg County, North Carolina. In May 1991, the court
entered a judgment (the Judgment) in favor of Louise, awarding
her principal and interest owed pursuant to the note and
reasonable legal expenses in an amount that was to be determined
by the court at a later date. In 1991, after the Judgment, John
paid Louise $160,000, all of which Louise recognized as interest
income on her 1991 Federal income tax return.
In 1992, Louise initiated, and paid $8,475 of expenses
relating to, litigation to execute the Judgment. She canceled
the execution proceedings, however, to allow the parties to
negotiate a settlement. On December 9, 1992, Louise and John
entered into a Settlement Agreement and Release (the 1992
Agreement) that resolved Louise's collection suit. John agreed
to transfer to Louise a 59-acre tract of land (the Land) that he
received as part of the 1989 Property Settlement. In exchange,
Louise authorized the cancellation of the Judgment and agreed to
surrender to John the promissory note. Pursuant to the 1992
Agreement, the transfer of the Land, in December 1992, discharged
all of John's debts to Louise, which totaled $2,153,845 and
included the following: (1) $1,500,000 of note principal; (2)
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