Delta Plastics, Inc. - Page 7




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          Yearend Financial Information                                               
               1993          1994           1995           1996                       
          Gross Revenue         $  359,714     $5,246,515    $ 8,840,065     $13,580,098
          Total Assets           4,287,799      7,391,115     12,001,652      14,611,042
          Total Liabilities      4,119,859      6,638,531     10,443,799      11,392,737
          Shareholder Equity       167,940        752,584      1,557,853       3,218,305
          Debt-to-Equity Ratio       25:1            9:1           7:1             4:1

               As of the time of trial in 2002, petitioner had yet to                 
          declare or pay a cash dividend.                                             
               At the end of 1993, petitioner’s basis in its capital assets           
          including land, buildings, equipment, vehicles, tooling and                 
          equipment was $3,598,463.                                                   
               For 1993-1996 and for Federal income tax purposes,                     
          petitioner was a cash basis taxpayer.  On petitioner’s timely               
          filed 1996 corporate Federal income tax return, an interest                 
          deduction of $93,746 was reflected for the payments designated as           
          interest that petitioner made in 1996 on the debenture notes.               
               On audit, respondent determined that for Federal income tax            
          purposes the total debenture funds of $1,337,500 represented                
          equity to petitioner rather than debt, and respondent denied                
          petitioner’s claimed $93,746 interest deduction relating to the             
          designated interest paid in 1996 on the debenture funds.                    

                                       OPINION                                        
               As a general rule, section 163(a) provides that a deduction            
          shall be allowed for all interest paid on indebtedness.                     






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