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plan also discharged the note and other debts arising before
confirmation of the plan. See 11 U.S.C. sec. 1141(c) (1994). As
guarantor, Mr. Gregersen then became primarily liable for the
note’s payments. Accordingly, petitioners are entitled to a
deduction for interest accrued after the date of confirmation of
the bankruptcy plan.
II. Net Operating Loss Carryover
Respondent determined petitioners were not entitled to a
deduction for the portion of the 1994 net operating loss
carryover resulting from the 1993 interest deduction, 1990
through 1993 legal expense deductions, and a 1989 net operating
loss carryover. Petitioners were entitled to an accrued interest
deduction. The legal expenses, however, did not relate to Mr.
Gregersen’s Schedule C business, and, because petitioners did not
file 1987 or 1988 returns, or elect to waive carryback of the
1989 loss pursuant to section 172(b)(3), they could not establish
a carryover from 1989. Accordingly, petitioners are entitled to
a net operating loss relating to petitioners’ deduction of
interest accruing from May 28 through December 31, 1993, on the
note.
III. S Corporation Deductions
Respondent disallowed a portion of the 1994 interest
deductions claimed by EBNI. Petitioners, as the sole
shareholders, were required to take into account all of EBNI’s
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