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for the Western District of Texas, El Paso Division (the
bankruptcy court). On April 27, 1989, the bank filed an Original
Verified Complaint and Application for Temporary Restraining
Order and Preliminary Injunction combined with Complaint for
Declaratory Judgment (the complaint) in petitioner's bankruptcy
case. The complaint sought to offset a pension fund deposit
account and two commercial checking accounts maintained by
petitioner at the bank against the amount owed by PEC to the
bank. On or about August 7, 1989, the bank filed an Amended
Proof of Claim in petitioner's bankruptcy case in the amount of
$1,108,472.60. In response to the complaint, the bankruptcy
court entered an order (the order) in January 1990 which
permitted the bank to exercise setoff rights on $260,000 of funds
from petitioner's bank accounts and required petitioner to pay
approximately $190,000 to the bank from petitioner's property
acquired after filing the bankruptcy petition, for a total of
$450,000.
On February 7, 1990, petitioner and his bankruptcy estate,
through bank offsets and direct payments, paid a total of
$450,000 to the bank in satisfaction of the bank's Amended Proof
of Claim. On petitioners' 1990 joint income tax return,
petitioners claimed deductions for NOL's from the bankruptcy
estate and for expenses to protect petitioner's business
reputation in the amounts of $299,920 and $143,070, respectively.
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