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had considered canceling the escrow and had discussed this
possibility with their attorney, but upon being advised that
liability would result from a cancellation, they decided to go
through with the transaction. Later that summer, as the crowds
and disruption persisted, Gerald Chamales (petitioner) inquired
of his broker Solton whether the value of his property had
declined. Solton indicated that she estimated a decrease in
value of 20 to 30 percent.
Petitioners’ 1994 tax return was prepared by Ruben Kitay
(Kitay), a certified public accountant. In the course of
preparing this return, Kitay and petitioner discussed the
possibility of claiming a deduction for casualty loss. After
preliminary research in the regulations addressing casualty loss,
Kitay spoke with two area real estate agents regarding the amount
by which petitioners’ property had decreased in value. The
agents estimated the decline at 30 to 40 percent. Kitay and
petitioner decided to use the more conservative 30 percent figure
in calculating the deduction to be taken on petitioners’ return.
An expert appraisal was not obtained at this time, as Kitay felt
that a typical appraisal based on values throughout the Brentwood
Park area would be inconclusive as to the loss suffered by the
few properties closest to the Simpson home.
Kitay and petitioner also recognized and discussed the fact
that there existed a substantial likelihood of an audit focusing
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