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petitioner’s Federal income tax returns for the years in issue.
No interest expenses from the advances were reflected on UPE’s
Federal income tax returns.
Although UPE received progress payments from Formosa
totaling $7,778,963, it could not complete any of the
construction projects. Rain delays, equipment supply problems,
and change orders slowed UPE’s progress. In April 1992, Formosa
gave UPE written notice of intent to terminate the contracts.
UPE ceased operations, and on April 24, 1992, UPE brought suit
against Formosa in the U.S. District Court for the Southern
District of Texas, Victoria Division, Civil Action No. V-92-16.
In its lawsuit against Formosa, UPE claimed $2,082,000 in
damages, alleging that Formosa failed to pay amounts due on
contracts and that UPE had suffered damages from Formosa’s delays
and hindrance. In settlement, UPE and Formosa entered into a
formal agreement under which Formosa agreed to pay UPE $700,000
in full satisfaction of all claims. In 1994, UPE received a net
recovery of $227,113.97. After the settlement, UPE ceased
operations and sold its inventory of used equipment for scrap
metal.
On its 1994 Form 1120, U.S. Corporation Income Tax Return,
petitioner claimed the outstanding advances to UPE as a bad-debt
deduction. Attached to petitioner’s 1994 tax return was a Form
8275, Disclosure Statement, on which petitioner claimed that
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