Donald L. Head - Page 5

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          Issue 1.  Foreclosure Loss                                                  
               The first issue we consider is whether petitioner is entitled          
          to the claimed foreclosure loss deduction in 1986.  Petitioner              
          argues that the Jensen Road property was constructed as a "spec"            
          house, and as such constituted business or investment property.  He         
          asserts that even though the Jensen Road house was used as his and          
          Ms. Head's residence after the anticipated sale of the house fell           
          through, the house retained its business character because it was           
          used to obtain financing for his retail coin and stamp business.            
          Respondent disagrees, contending that once petitioner used the              
          Jensen Road house as his and Ms. Head's residence, the business or          
          investment character, if any, of the Jensen Road property                   
          terminated.  Thus, respondent asserts, the foreclosure loss is not          
          deductible as it was sustained in connection with property held by          
          petitioner for personal purposes.                                           
               Section 165(a) allows as a deduction any loss sustained by the         
          taxpayer during the taxable year not compensated for by insurance           
          or otherwise.  However, section 165(c) limits deductions for losses         
          of individuals to those incurred in a trade or business, incurred           
          in a transaction for profit, or as a result of a casualty or theft.         
               For tax law purposes, a foreclosure has the same effect as a           
          "sale or exchange".  Helvering v. Hammel, 311 U.S. 504 (1941);              
          Quinn v. Commissioner, T.C. Memo. 1983-485.  Losses attributable to         
          the sale of a family residence are nondeductible personal losses.           
          Sec. 262; Austin v. Commissioner, 35 T.C. 221 (1960), affd. 298             

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