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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