2
1987 90,373 23,940 4,788 2
1988 148,173 7,409
Additions to tax
Sec. Sec. Sec.
Year 6653(a)(1) 6653(a)(2) 6661
1985 $2,843 3 $14,115
1986 --
1987 22,319
1988 7,409 21,078
1 Fifty percent of the interest due on $6,343.
2 Fifty percent of the interest due on $90,373.
3 Fifty percent of the interest due on $56,672.
After concessions, the issues for decision are:
(1) Whether petitioners may deduct $750,000 petitioner-
husband paid in 1988 to settle civil litigation related to his
guarantee of the debt of Northeast Cellulose, Inc. (Northeast),
claims of creditors of Northeast, and his bankruptcy proceedings.
We hold that they may not deduct the portion (50 percent) of the
settlement payment attributable to petitioner's guaranty of
Northeast's line of credit because his dominant motive for making
the guaranty was to protect his investment in Northeast. We also
hold that they may deduct the portion (50 percent) attributable
to claims of Northeast's creditors (other than the bank to which
petitioner made the guaranty), subject to the 2-percent limit in
section 67, because petitioner's payment to settle claims of
Northeast's creditors other than the bank originated in his
conduct as an officer or employee of Northeast and in action
taken by him as an investor-shareholder of Northeast.
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