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against the officers of Dutchess, and on January 6, 1988,
judgment was entered which required petitioners to remove from
their residence located at 795 Rensens Lane, Muttontown, New
York. Petitioners vacated their premises pursuant to a
February 8, 1988, notice to vacate.
Petitioners claimed a business bad debt loss of $250,000 on
their 1988 Federal tax return as a result of the loss of their
residence in 1988. Petitioners carried over $232,361 of the
ordinary loss claimed but not used on their 1988 return to their
1989 return.
Discussion
The sole issue for decision is the proper treatment of the
loss resulting from the use of petitioners' residence to satisfy
the guarantee obligation of petitioner Glenn Peterson to Agway in
the amount of $205,522.72.3 Petitioners claim that they are
entitled to a business bad debt deduction under section 166(a).
Respondent asserts that the amounts paid on the guarantee
represent a contribution to the capital of Dutchess and should be
treated as a capital loss under section 165(g) and that, if the
3 While petitioners claimed a bad debt deduction of
$250,000.00 on their 1988 return, there is no evidence to support
any amount in excess of $205,522.72, the amount of the loss which
respondent has conceded petitioners are entitled to deduct as a
capital loss stemming from the worthlessness of Glenn Peterson's
shareholder interest in Dutchess. Respondent does not contest
the worthlessness of that interest.
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