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to collectively as the $1 million advance). The second advance
occurred on December 31, 1999, when Messrs. Brooks each advanced
$800,000 to the company on open account (referred to collectively
as the $1.6 million advance). The third advance occurred on
December 29, 2000, when Messrs. Brooks each advanced $1.1 million
to the company on open account (referred to collectively as the
$2.2 million advance). On January 5, 1999, the company made a
$500,000 repayment to each of Messrs. Brooks (referred to
collectively as the $1 million repayment). On January 3, 2000,
the company made a $800,000 repayment to each of Messrs. Brooks
(referred to collectively as the $1.6 million repayment).
As of the close of 1998, the outstanding balance of open
account debt owed by the company to Messrs. Brooks equaled the
amount advanced to the company during 1997; i.e., $1 million.
However, pro rata company losses during 1997 and 1998 had reduced
Messrs. Brooks’s basis in the open account debt to zero.
When Messrs. Brooks made the $1.6 million advance at the
close of 1999, it was an amount sufficient, in Messrs. Brooks’s
view, to (1) provide a basis offset for the $1 million repayment
and (2) allow for the recognition by Messrs. Brooks of their pro
rata share of company losses incurred during 1999.3
3Petitioners contend that Messrs. Brooks’s bases in the open
account debts were also reduced by offsetting the $1 million
repayment. As discussed below, respondent contends that the
repayment of open account debt may not be offset by the basis of
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