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counterclaim against petitioner and the other related entities
praying for the sum of $5,302,901.31. On January 31, 1991, the
claim and counterclaim were denied in their entirety, and each
side bore its own costs and attorney's fees.
Petitioner's 1987 and 1988 Federal income tax returns were
prepared by the C.P.A. In connection therewith, Ms. Martin gave
the C.P.A. the books and records of petitioner, Kenilworth, and
the other related entities.3 Petitioner's 1987 return reported a
deduction for a $5 million bad debt. Respondent disallowed this
deduction, stating in the notice of deficiency that "It has been
determined that a $5,000,000 bad debt loss claimed in the tax
year ended February 29, 1988, is not deductible because it does
not qualify under sections 162 or 165 of the Internal Revenue
Code."
OPINION
The primary issue before the Court is whether petitioner may
deduct $5 million of the advances that it claims were loans to
Kenilworth, and that it claims were worthless at the end of its
1987 taxable year. Respondent determined that petitioner could
not deduct any of this amount as either: (1) An ordinary and
necessary business expense under section 162 or (2) a loss under
3 Ms. Martin reconciled each broker and bank statement at
the end of each business day, and she met with Mr. Roven daily to
assure the accuracy of her reconciliations and the other business
records. At these meetings, Ms. Martin and Mr. Roven also
discussed that day's transactions, and he directed her to make an
intercompany transfer of funds to the entities that needed cash.
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