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the property in the amount of $43,356. The property was
foreclosed and sold in that year for $54,435. Of this amount,
$43,356 was used to pay off petitioners' mortgage on the
property. Petitioners did not receive any other amounts from the
sale.
In 1991, petitioners' adjusted basis for the Campbell
property was $84,459, and they were personally liable for a
mortgage on the property in the amount of $88,491. The property
was foreclosed and sold in that year for $106,620. Of this
amount, $88,491 was used to pay off petitioners' mortgage on the
property. Petitioners did not receive any other amounts from the
sale.
On their 1991 Federal income tax return (return),
petitioners did not report any gain with respect to the
foreclosure transactions, but instead claimed a deduction for
ordinary losses on Form 4797 in the amount of $13,600, which
petitioners computed as the excess of the properties' foreclosure
sales prices over the mortgage balances plus depreciation. In
effect, petitioners claimed a loss for their equity in the
properties less depreciation.
Petitioners' return was filed on October 16, 1992.
In the notice of deficiency, respondent disallowed the
$13,600 in claimed losses and determined that petitioners had
long-term capital gains in the amount of $43,633, computed as the
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