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We believe that identifiable events, occurring in 1993, formed a
reasonable basis for petitioners to abandon all hope of recovery
during that year. It was during 1993 that the Drunken Lobster
ran on a skeleton crew and permanently ceased its operations.
Although the Dubatos were having financial problems during 1992,
it was not until the closure of the Drunken Lobster that the
Dubatos’ means with which to repay petitioners were eliminated.
The Dubatos had no other assets from which petitioners could
collect on their debts. Moreover, there is sufficient evidence
for us to find that legal action to enforce payment would be
futile. Accordingly, petitioners are entitled to a nonbusiness
bad debt deduction for 1993.4
To reflect the foregoing,
Decision will be entered
under Rule 155.
4 We note that a nonbusiness bad debt deduction is treated
as a short-term capital loss subject to the capital loss
limitation of sec. 1211(b). Sec. 166(d); sec. 1.166-5(a)(2),
Income Tax Regs. Sec. 1211(b) restricts petitioners’ deduction
to the extent of their capital gains plus (if losses from sales
or exchanges of capital assets exceed such gains) the lesser of
$3,000 or the excess of such losses over such gains.
Petitioners, however, are permitted to carry over any capital
loss in excess of this amount to the succeeding taxable year.
Sec. 1212(b).
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