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OPINION
I. Whether Payments Made by HJA in Connection With an Option and
Stock Purchase Agreement, Which Were Applied to the FirsTier Note
and the Chevrolet Debt, Are Taxable to Henry and Esther as
Ordinary Income and Deductible by HJA, Inc., & Subsidiaries
A. The Parties’ Arguments
Henry and Esther contend, in effect, that any payments made
by HJA on the FirsTier note and the Chevrolet debt, either
directly or through the sweep account, did not result in taxable
income to them because the payments did not qualify as covenant
not to compete payments, nor did the payments relieve them of any
primary liability under the FirsTier note and the Chevrolet debt.
Rather, Henry and Esther contend that the payments were made by
HJA to pay down HJA’s own liabilities as to which Henry and/or
Esther were only accommodation parties. HJA disagrees, claiming
that Henry and Esther were primary obligors as to the FirsTier
note and that Henry was the primary obligor as to the Chevrolet
debt; thus, payments made to FirsTier and Chevrolet by HJA from
1990 through 1996 are ordinary income to Henry and Esther and
deductible by HJA.20
20Respondent did not present an argument as to this issue
and makes no assumptions as to Henry and Esther’s status in
relation to the loans. Respondent concedes that if we hold that
Henry and Esther are the primary obligors on the FirsTier note
and the Chevrolet debt, then HJA is entitled to a full deduction
for the payments that were applied to those liabilities, and
Henry and Esther must include the payments as ordinary income on
their tax returns. Alternatively, respondent concedes that if
Henry and Esther are determined to be accommodation parties on
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