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section 166(d)(1)(B)1 for punitive damages that were awarded to,
but not collected by, petitioner Frank A. Walter during that
year?2 We hold that they are not.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners resided in Yachats, Oregon, at the time the
petition was filed. Petitioners used the cash method of account-
ing for Federal income tax purposes and filed a joint Federal
income tax return for 1991 (1991 return).
On February 27, 1991, petitioner Frank A. Walter3 instituted
a civil lawsuit in the Superior Court of California for the
county of Sacramento against an individual named Jeffrey Erkel
(Mr. Erkel) alleging fraud in connection with the handling of a
real estate project in which petitioners had invested $10,000.
On June 19, 1991, a default judgment was entered against Mr.
1 All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
2 In the notice of deficiency, respondent disallowed the $50,000
with respect to the punitive damages at issue that petitioners
claimed in their 1991 Federal income tax return as a loss that
reduced their gross income. As a result of the foregoing adjust-
ment, respondent determined that petitioners' Social Security
income for that year was understated. Petitioners do not dispute
that if respondent's determination disallowing their claimed
$50,000 loss were to be sustained, respondent's determination
relating to their Social Security income for 1991 would be
correct.
3 References to petitioner in the singular are to petitioner
Frank A. Walter.
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