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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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