Lee D. Froehlich - Page 19

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               In sum, the record does not persuade us that settlement                
          discussions had ended prior to the purported admissions by                  
          petitioner.  Examining the totality of the circumstances, we                
          believe it is consonant with the purpose of rule 408 of the                 
          Federal Rules of Evidence, to decline to include the purported              
          statements made by petitioner in the record.  Hence, petitioner's           
          motion to exclude respondent's counsel's testimony will,                    
          accordingly, be granted.                                                    
               B.  Capital Versus Ordinary Loss                                       
               Petitioner guaranteed the auto dealership's floor plan loan,           
          which was utilized to purchase automobiles from the manufacturer            
          for inventory purposes.  Three years later, petitioner’s assets             
          were used to make a $400,000 payment to Sanwa Bank to fulfill the           
          guaranty obligation, which petitioner deducted as a business bad            
          debt.  Respondent contends that the bad debt is a nonbusiness bad           
          debt and may not, therefore, be used to generally reduce ordinary           
          income.  In other words, respondent determined that petitioner is           
          entitled to a short-term capital loss, and petitioner bears the             
          burden of establishing that respondent's determination is                   
          erroneous.  Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115              
          (1933).  Also, deductions are a matter of legislative grace, and            
          petitioner has the burden of proving his entitlement to the                 
          claimed deductions.  See New Colonial Ice Co. v. Helvering, 292             
          U.S. 435, 440 (1934).                                                       





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