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provide for payment of principal and interest to be subordinated
to payment in full of all amounts outstanding under the bank
loans. The agreement for the bank loans in general prohibits any
payment of principal or interest on the Subordinated Loans before
January 1, 1994.
Petitioner did not make any interest payments under the 1991
or 1992 Subordinated Loans during the years in issue. Rather,
petitioner accrued interest on the 1991 and 1992 Subordinated
Loans during the years in issue as follows:
Accrual year 1991 Sub’d Loans 1992 Sub’d Loan Total
1991 $21,075,101 $21,075,101
1992 35,710,584 $2,831,111 38,541,695
The 1991 and 1992 Subordinated Loans constituted debt for U.S.
Federal income tax purposes.
Schneider, MGSA, TESA, and SNC were not engaged in a trade
or business within the United States for U.S. Federal income tax
purposes during the years in issue. Interest accrued by
petitioner had the following characteristics: (i) It was not
includible in the gross incomes of Schneider, MGSA, TESA, or SNC
for U.S. Federal income tax purposes; (ii) it was from sources
within the United States for U.S. Federal income tax purposes;
and (iii) it was not effectively connected with the conduct of a
U.S. trade or business for U.S. Federal income tax purposes.
During the years in issue, petitioner and the Schneider Lenders
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