Stephen F. Scofield and Nancy E. Scofield - Page 2

                                                                            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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