Karns Prime & Fancy Food, Ltd. - Page 15

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          default under that supply agreement.14  As a result, petitioner             
          was not obligated to make on each of those dates the annual                 
          payment set forth in the April 15, 1999 note.  In petitioner’s              
          books and records for each of the years ended January 30, 2001,             
          and January 30, 2002, petitioner reduced by $250,000 the balance            
          of its long-term notes payable.  In each of petitioner’s tax                
          returns for those respective years, petitioner reported $250,000            
          as “Other Income--Reduction of Supplier Note Agreement”.                    
               On March 9, 2001, petitioner executed a document entitled              
          “COMMERCIAL NOTE” (March 9, 2001 commercial note)15 payable to              
          SUPERVALU in the amount of $300,000.  On or about the same date,            
          petitioner received a $300,000 check drawn on an account of                 
          SUPERVALU.  The March 9, 2001 commercial note provided in perti-            
          nent part:                                                                  
                    FOR VALUE RECEIVED, Karns Prime and Fancy Food                    
               Ltd. * * * (collectively the “Maker”), promise[s] to                   
               pay to SUPERVALU * * * (“Lender”) * * * the principal                  
               sum of Three Hundred Thousand and No/100 Dollars                       
               ($300,000.00), plus interest, all as set forth below.                  

               14Instead of discussing whether petitioner complied with,              
          materially breached, and/or was in uncured default under the                
          April 16, 1999 supply agreement, for convenience, we shall                  
          discuss only whether petitioner was in material breach of or                
          materially breached that supply agreement.  However, our refer-             
          ences to whether petitioner was in material breach of or materi-            
          ally breached the April 16, 1999 supply agreement are intended              
          also to pertain to whether petitioner complied with and/or was in           
          uncured default under that supply agreement.                                
               15By using the term “March 9, 2001 commercial note”, we do             
          not intend to suggest that for tax purposes there was a loan by             
          SUPERVALU to petitioner that was evidenced by that document.                

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