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that respondent believes afforded RTA a reasonable prospect for
recovering its investment. The sole issue we must decide is
whether RTA failed to sustain a loss in 1991 because the lawsuit
afforded RTA a reasonable prospect of recovery. That presents a
question of fact, and petitioners bear the burden of proof. Rule
142(a). Petitioners have failed to carry that burden.
II. Summary of Facts
In 1989, RTA and Environmental Disposal Systems, Inc. (EDS),
entered into an agreement (the agreement) for the acquisition by
RTA from EDS of the tire transformation system (TTS).
Difficulties ensued, and, in September 1990, RTA sued EDS for
breach of contract (the lawsuit), its principal requests being
specific performance, delivery of the TTS, and injunctive relief.
In May 1991, RTA discharged its employees and ceased business
operations. It claimed a loss on its 1991 Federal income tax
return on account of abandonment of the TTS (the TTS loss) and
reported the TTS loss to the shareholders. The lawsuit was
concluded in 1992, when EDS agreed to pay RTA $2.1 million, none
of which, however, has been paid.
III. Law Applicable to Deductions of Losses
A. Allowance for Losses Sustained During the Taxable Year
With limitations not here pertinent, section 165 "[allows]
as a deduction any loss sustained during the taxable year and not
compensated for by insurance or otherwise." Sec. 165(a).
Section 1.165-1(b), Income Tax Regs., provides: “To be allowable
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