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1998
During 1998, Paulan wrote four checks to Sidal as follows:
Jan. 20 $100,000
Feb. 17 200,000
Aug. 25 18,000
Oct. 27 650,000
Total 968,000
The source of those payments was the $1 million Merchants Bank
loan.
Sidal’s adjusted trial balances for the taxable years ending
December 31, 1998, 1999, and 2000, reflect a note payable to
Paulan in the sum of $928,000,10 and Paulan’s adjusted trial
balance for the taxable year ending December 31, 1998, reflects a
corresponding note receivable from Sidal. No adjusting entries
were made on those trial balances to recharacterize Paulan’s 1998
payments to Sidal, to the extent of $928,000, as Paulan’s loans
to petitioners and petitioners’ loans to Sidal.11 Handwritten
10 There is no explanation in the record for the
discrepancy between the total amount of the 1998 Paulan checks,
$968,000, and the $928,000 note payable from Sidal to Paulan
reflected on Sidal’s adjusted trial balances.
11 Although (1) a handwritten entry on Sidal’s adjusted
trial balance for its taxable year ending Dec. 31, 1999,
indicates that the $928,000 note payable to Paulan was “reclassed
by AJEs” (adjusting journal entries) and (2) Sidal’s general
ledger for 1999 reflects the elimination, on Oct. 19, 1999, of
$928,000 as an intercompany note to Paulan, Sidal’s adjusted
trial balance for the following year (2000) still reflects the
$928,000 as a note payable to Paulan as of Dec. 31, 2000.
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