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inspection and advance process with respect to the First National
loans. Mr. Black’s testimony and the evidence of record do not
preclude the possibility that some portions of the loans to Mr.
Assaad were set up as an interest reserve. In a case like that,
allowing interest deductions on the basis of other evidence in
the record might result in a double-counting of those expenses.
Petitioners rely on several loans which are not construction
loans. Those loans are fully secured with property other than
the Atherton real estate. After examining the evidence of record
with respect to those loans, we are not convinced that they
provide a rational basis for estimating the expenses they
purportedly represent under petitioners’ method of
reconstruction. Further, we are not convinced that those amounts
were used in their entirety to pay construction expenses in the
Atherton project. Indeed, it appears plausible, and with respect
to some of the loans it is clear, that the loan proceeds may have
been used to pay interest on the Pacific construction loan. In
that case, and since petitioners claim to have paid interest with
funds other than those loan proceeds, there could result in a
double-counting of interest expenses.
Pacific prepared a document entitled “Loan Credit
Memorandum” which indicates that the $320,000 loan was earmarked
in its entirety for payment of $160,000 of past due interest on,
and an additional $160,000 interest reserve for, the Pacific
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