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petitioner and the State, the parties agreed that settlement
included prejudgment interest. Based on the foregoing facts and
circumstances, we find that $34,618 of the $61,604 should be
treated as interest income to petitioners.
Issue 3. Capital Loss
In 1989, petitioners sold the stock fund for $27,205.57.
Respondent determined that petitioners had a basis of $29,214.38
in the stock fund. On brief, respondent concedes that
petitioners had a basis of $29,214.38 in the stock fund,
representing their original $19,750 investment plus two dividend
reinvestments of $7,006.92 and $2,457.46. Accordingly, respondent
further concedes that petitioners are entitled to a $2,008.81
loss on the sale of the stock fund. Petitioners argue that their
basis should be $2,104.66 higher than determined by respondent
because they received a $2,104.66 distribution from the stock
fund in 1989 that they reinvested in the stock fund.
Section 165(a) allows a taxpayer to deduct "any loss
sustained during the taxable year and not compensated for by
insurance or otherwise." However, section 165(c) limits the
scope of this deduction for individuals. Individuals may take
deductions only for losses which are incurred in a trade or
business, losses incurred in transactions entered into for
profit, and certain casualty and theft losses. Sec. 165(c)(1),
(2), and (3).
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