Stephen F. Scofield and Nancy E. Scofield - Page 22

          Thus, even though Northeast had stopped doing business several              
          years before petitioner made the payments, petitioners may deduct           
          part of the settlement payment relating to petitioner's conduct             
          of his duties as an officer and employee of Northeast under                 
          section 162 and relating to actions taken by him as an investor-            
          shareholder under section 212.  However, petitioners' deduction             
          is limited by section 67, under which expenses are deductible to            
          the extent that they exceed 2 percent of the taxpayer's adjusted            
          gross income.                                                               
               4.   Allocation of Settlement Payment Between Guaranty and             
                    Other Creditors' Claims                                           
               We apportion petitioner's $750,000 settlement payment                  
          between the claims of the bank relating to petitioner's guaranty            
          of Northeast's line of credit and the claims of Northeast's other           
          creditors.  The $750,000 was not all paid on the guaranty                   
          because, when the complaint was filed, Northeast owed only                  
          $561,530 to the bank.  Northeast's nominee had already collected            
          at least $726,000 on Northeast's debts when Northeast's creditors           
          agreed to allocate recoveries.  Under that agreement,4 the bank             
          could recover no more than $375,000 (50 percent of $750,000).  We           
          hold that petitioner may deduct 50 percent of the settlement                
          payment for the claims of Northeast's creditors other than the              
          bank, but must treat as a short-term capital loss 50 percent of             

               4 The creditors' agreement provided that the bank would                
          receive the first $200,000 collected by Northeast's nominee, and            
          50 percent of any other money collected.  Northeast's nominee               
          collected at least $726,000, of which the bank presumably                   
          received the first $200,000.                                                

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