Michael H. Gulley and Paula M. Gulley - Page 8




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          under chapter 7 on November 20, 1991.  Petitioner’s bankruptcy                 
          case closed in August 1993.                                                    
               6.   GSD’s Final Partnership Return                                       
               GSD reported that interest accrued on the Sunbelt loan from               
          its initial return in 1984 until its final return for 1991.  GSD               
          reported assets, loan balances, and accrued interest on its 1988,              
          1989, 1990, and 1991 Forms 1065, U.S. Partnership Return of                    
          Income, as follows:                                                            
          End of year     End of year                                                    
          Year     Assets    loan balance  accrued interest                              
          1987  $65,156,718     $77,978,575     $11,276,795                              
          1988        1,474      27,742,833       2,523,458                              
          1989            1      27,742,833       5,297,741                              
          1990            1      27,742,833       8,072,024                              
          1991            1      27,742,833       9,531,373                              
               GSD accrued interest expense on the Sunbelt note of                       
          $1,459,349 for 1991 from January 1 to July 11, 1991.                           
               On July 15, 1992, GSD filed a Form 1065 for the period from               
          January 1 to July 11, 1991, which it designated as its final                   
          return.  Petitioner signed GSD’s return for 1991 in his capacity               
          as general partner.  GSD deducted interest expense of $1,459,349               
          on its 1991 return (GSD’s 1991 accrued interest deduction).  The               
          interest deduction created a $1,459,349 loss (the 1991 loss)                   
          because GSD reported no income.  The Schedules K-1, Partner’s                  



               1(...continued)                                                           
               bankruptcy * * * a successor General Partner is elected                   
               by a majority in interest, and not in numbers of the                      
               remaining Partners;.                                                      





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