Richard A. and Carol B. Little - Page 1

                                 T.C. Memo. 1996-270                                  

                               UNITED STATES TAX COURT                                

                    RICHARD A. AND CAROL B. LITTLE, Petitioners v.                    
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 27374-93.                   Filed June 12, 1996.            

                    P owned stock in Dondi Financial (DF).  DF held 97                
               percent of the stock of Vernon (V).  V was a savings                   
               and loan.  The FHLBB seized V, terminated its                          
               operations, and appointed the FSLIC as its receiver in                 
               March 1987.  DF filed for bankruptcy in May 1987.                      
                    P owned stock in Texana (T).  T held 98 percent                   
               of the stock of Texana Savings & Loan (TSL).  The FHLBB                
               put TSL in receivership and appointed the FSLIC to                     
               liquidate TSL in August 1988.  P deducted losses for                   
               worthless stock from DF in 1987 and T in 1988.  R                      
               disallowed part of the DF loss and all of the T loss.                  
               R amended the answer, contending that P owed an                        
               additional deficiency because the DF stock became                      
               worthless in 1985.                                                     
                    R called two FBI agents as witnesses and offered                  
               into evidence 264 pages of interview notes.  In                        
               response to P's hearsay objection, R argued that the                   
               agents' oral testimony and notes were records or                       

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