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that time, petitioners were husband and wife and resided in
Dallas, Texas. Respondent filed an answer to the petition on
June 26, 1986.
The primary issue involved deductions claimed for losses on
transactions between petitioner Thomas L. Freytag (Mr. Freytag)
and First Western Government Securities, Inc. (First Western).
At that time there were more than 3,000 cases involving the same
issues. Test cases had been selected, and this case was held in
abeyance. The First Western issues were resolved in Freytag v.
Commissioner, 89 T.C. 849 (1987), affd. 904 F.2d 1011 (5th Cir.
1990), affd. on other grounds 501 U.S. 868 (1991).
On January 5, 1990, petitioners filed a petition in the U.S.
Bankruptcy Court for the Northern District of Texas, Dallas
Division. Respondent filed a proof of claim that was amended
several times to include, inter alia, the income taxes and
additions to tax for the years at issue in this case. Respondent
notified the Court of the bankruptcy proceedings, and pursuant to
11 U.S.C. sec. 362(a)(8) (1994) (Bankruptcy Code), this Court, on
May 2, 1991, stayed all proceedings in this case.
In the bankruptcy court, Mrs. Freytag objected to
respondent's amended proofs of claim. She did not contest the
underlying deficiencies for 1981 and 1982, and the parties
stipulated that the challenged deductions for 1981 and 1982 were
in fact grossly erroneous and had no basis in fact or law. See
Freytag v. Commissioner, supra. Rather, she sought a
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