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that a significant portion of the Pacific construction loan and
the First National loans went into the Atherton project.
However, we cannot agree with the assumption inherent in
petitioners’ indirect method of reconstructing those expenses,
that the entire amounts of the construction loans represent
deductible expenses. Thus, we cannot agree that petitioners’
reliance on the construction loans provides a rational basis for
estimating the amount of those expenses.
There is evidence that Mr. Assaad received some of the loan
proceeds as direct disbursements. Indeed, Mr. Assaad testified:
The construction guy, Trudell, do the computer run and
then every month we do development, and we go to the
two bank and we said: We develop $150,000 here,
$100,000 debt.
They pay us. We pay all the subcontractor. We
pay all the labor. We have 49 people working on those
three houses, every day, six days a week.
Q Did you ever write checks?
A Of course we have write checks, yes.
Petitioners did not produce any checks or any other comparable
evidence showing the amount of the loan proceeds that was paid
into the project. Further, Mr. Assaad received cash back on at
least one of the loan transactions involved in this case: He
received $120,802.70 cash on California Federal’s refinancing of
the First National Bank loans. Although petitioners do not rely
on that amount to estimate their construction expenses, the fact
that Mr. Assaad received cash directly on that loan suggests that
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