Phillip A. O'Bryon and Cyndie W. O'Bryon - Page 27

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               In 1990, Diplomat Associates, then a two-person partnership,           
          defaulted on its mortgage notes.  The creditor, a mortgage lender           
          unrelated to either partner, foreclosed upon the apartment                  
          building.  On May 30, 1991, the building was sold at auction for            
          $544,000.  Subsequently, the creditor obtained a deficiency                 
          judgment of approximately $870,000 against Diplomat Associates              
          and its two partners on the outstanding balance of the notes.  By           
          the end of 1991, Diplomat Associates had no assets and only a               
          liability for the unpaid balance of the notes.                              
               Diplomat Associates filed a return for 1991, purporting to             
          be a final return.  On that return, Diplomat Associates reported            
          a section 1231 loss of $352,061, the difference between the                 
          partnership's remaining tax basis in the property ($896,061) and            
          the foreclosure sale price.  On his 1991 tax return, Phillip                
          claimed a deduction for $176,031, one-half of the loss.                     
               In the notice of deficiency, respondent disallowed the                 
          entire section 1231 loss deduction on the ground that Phillip had           
          not disposed of his entire interest in Diplomat Associates within           
          the meaning of section 469(g).  Additionally, in the notice of              
          deficiency, respondent disallowed net operating loss (NOL)                  
          deductions of $32,322 for 1992, $70,982 for 1993, and $89,466 for           
          1994.  The NOL deductions were attributed to suspended passive              
          activity losses from Diplomat Associates carried over from years            
          prior to 1991.  Respondent disallowed each NOL deduction on the             

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