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$1,214. David did not make any payments on the Great Western
loan.
On July 7, 1995 petitioner’s accountant notified him the
amount of the deemed distribution was incorrect because Stephanie
had repaid the outstanding balance on her 1988 loans prior to
December 31, 1994. According to petitioner’s accountant, the
amount of the distribution should have been reduced by $5,905,
from $176,276 to $170,371. Respondent agreed with this
reduction.
By summer 1995, Stephanie was experiencing financial
difficulties from having to make 3 monthly payments. Stephanie
informed petitioner that she could no longer continue making
payments on the Great Western loan and was going to default.
Petitioner became concerned that he would lose his security
interest in the Atascadero property if Great Western foreclosed
on the first deed of trust. Petitioner’s fears were aggravated
when he discovered a State tax lien on the Atascadero property.
When he asked Stephanie about her other assets out of which his
note could be satisfied, Stephanie told him she had “nothing”.
Petitioner suggested to Stephanie that she was morally obligated
to sell the Oakland home to satisfy his note. During their
conversations, petitioner learned that Stephanie was
contemplating filing for bankruptcy protection. Petitioner
consulted a bankruptcy lawyer who advised that any gain from a
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