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during audit. And the Commissioner invoked his right to exclude
the testimony of the accountant who’d prepared Murphy’s tax
returns on the ground that he had not been identified in Murphy’s
pretrial memorandum.
We are therefore forced to rely mostly on our evaluations of
Murphy’s truthfulness and the rather thin paper trail. And, in
the end, we do find that Murphy’s testimony was credible. Due to
the length of his dealings with Hunt, including many successful
trades and coownership of some horses, we find that their
relationship was strong enough to explain Hunt’s willingness to
extend the payment schedule for Hamseh and Desert Spice. Apart
from unsuccessfully challenging Murphy’s credibility, and despite
having the burden of proof on this issue, the IRS provided no
direct evidence that Murphy did not owe Hunt money for those two
horses when he mailed Hunt the $225,000 check. We therefore find
that Murphy has shown that a valid indebtedness on Hamseh and
Desert Spice still existed at the end of 1997. See First Natl.,
289 F.2d at 866 (leniency by lender in not pressing for
collection on debt does not create presumption that debt is
invalid).
The Commissioner next argues that, even if those notes were
still outstanding, Murphy must have intended to use the money to
repay the principal owed for On the Piste, because $225,000 was
the exact amount that Murphy still owed Hunt for that horse.
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