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claim, petitioners and CDC decided to cancel escrow. CDC agreed
to accept $650,000 to terminate its rights under the Agreement.
By letter dated February 4, 1992, Mr. Steinman informed Escrow
Holder that petitioners and CDC agreed to cancel the Phase II
escrow. On February 14, 1992, petitioners and CDC signed a
“Mutual Release” in which they agreed to terminate the sale of
Phase II and to release each other from any causes of action
relating to the Agreement.
Pursuant to the terms of the Mutual Release, the parties
agreed that CDC would receive up to $650,000 from petitioners “as
consideration” for executing the Mutual Release: $600,000 to be
paid at the signing of the Mutual Release and an “Additional
Amount” of $50,000 to be paid upon, inter alia, the return of
CDC’s work product on the Phase II project. On May 28, 1992,
petitioners paid to CDC $42,500 of the Additional Amount.
Petitioners retained $7,500 of the Additional Amount, which they
considered to be an offset of CDC’s share of the legal fees that
petitioners had incurred as a result of the State’s tidelands
easement claim.6
On their 1992 tax return, petitioners did not claim a
deduction for the $642,500 paid to CDC in 1992. Petitioners also
6 The record contains a considerable amount of information
pertaining to events that occurred between petitioners and the
State, and petitioners and First American, after the years at
issue. We do not consider this information to be of any
relevance to the years before the Court.
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