Robert H. and Mildred M. Bettisworth - Page 3




                                                - 3 -                                                  
            Background                                                                                 
                  Petitioners, husband and wife, resided in Fairbanks, Alaska,                         
            at the time they filed their petition in this case.                                        
                  At all relevant times, Robert H. Bettisworth (petitioner) was                        
            a 33.3-percent shareholder in Narwhal, Inc. (Narwhal), an S                                
            corporation.  At the end of 1992, petitioner’s basis in his Narwhal                        
            stock was zero; in 1993, his basis increased to $68,125 as a result                        
            of a loan he made to the corporation.                                                      
                  Narwhal was in the business of developing real estate. In                            
            1993, Narwhal was forced to surrender most of its real estate                              
            holdings through foreclosure.  As a result, Narwhal realized COD                           
            income of $3,321,471.  Because Narwhal was insolvent, the COD                              
            income was treated as nontaxable pursuant to section 108.  For                             
            1993, Narwhal had ordinary losses of $2,586,238.                                           
                  Narwhal issued petitioner a Schedule K-1 for 1993, reflecting                        
            his distributive share of Narwhal’s COD income ($1,107,155) and                            
            ordinary losses ($862,078).  Petitioner increased the basis in his                         
            Narwhal stock by the amount of his distributive share of Narwhal’s                         
            COD income, and amended returns were filed in order to take                                
            advantage of previously disallowed net operating losses (NOL’s).2                          
            The NOL’s were first carried back 3 years and then carried                                 





                  2     Before 1993, petitioners had $275,323 in suspended                             
            losses.                                                                                    




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