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.Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Next
Last modified: May 25, 2011