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restoration of the Feadship totaled approximately $2 million. A
memorandum petitioner received from the law firm noted that
petitioner’s cumulative costs in purchasing and restoring the
Feadship exceeded the Feadship’s fair market value and that yet
additional significant costs would be necessary to complete the
restoration of the Feadship. Petitioner was advised that a sale
of the Feadship before completion of the restoration work and
without establishing a yacht chartering operation for the
Feadship would preclude treatment by petitioner of any loss on
the sale of the Feadship as an ordinary loss under section 1231.
In November of 1992, petitioners and Angus settled the
above-referenced lawsuit pursuant to which petitioner agreed to
pay Angus an additional $480,000 -- $300,000 in cash and a
$180,000 promissory note with principal and interest due in
3 years. Petitioner paid Angus the $300,000, and Angus released
the maritime lien on the Feadship. With petitioner’s consent,
Captain Coby then transported the Feadship to a shipyard in Bayou
La Batre, Alabama.
At the shipyard in Bayou La Batre, much of the prior
restoration work that had been done by Angus on the Feadship, at
a cost to petitioner of approximately $1 million, was determined
to be in need of being redone either because the work was
defective or for other reasons. From late 1992 until June of
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