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Issue 1. Southern Express
Respondent determined that the $325,000 loss petitioners
sustained with respect to Southern Express in 1985 is from the
worthlessness of a nonbusiness debt, producing a short-term
capital loss. Petitioners assert that it is an ordinary loss.
Southern Express was incorporated on May 8, 1984, for the
purpose of operating a commuter airline within Texas. Scot
Spencer (Spencer) was the registered agent for Southern Express.
Spencer was well versed in airline terminology and encouraged
petitioner's involvement with Southern Express. Petitioner had
no previous experience in the airline business but agreed to fund
some of the startup expenses and to locate other investors.
After a short time, petitioner realized that Spencer had
made inaccurate and possibly even fraudulent representations
regarding Southern Express. Upon this realization, petitioner
requested that Spencer return the money he had invested. On
November 7, 1984, Spencer, on behalf of Southern Express,
executed a note to petitioner promising to pay petitioner
$325,000 over a 2-year period. Spencer failed to make any
payments on the note. Consequently, petitioners sustained a loss
of $325,000.
On their 1985 Federal income tax return, petitioners
reported the $325,000 loss as ordinary. Respondent determined
that the loss is a capital loss and is therefore limited under
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