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Petitioner’s Federal income tax returns, beginning in 1985
or 1986, were prepared by Von A. Gammon (Gammon), who at the time
he prepared petitioner’s 1994 return had been practicing
accounting for 10 years. Gammon was not aware that HGTG had
filed a 1994 return. Gammon also knew that petitioner had an
unused loss carryover of $200,000 in connection with HGTG because
petitioner did not have sufficient basis to claim the loss.
Because of Gammon’s knowledge of HGTG’s creditors and outstanding
debt, he believed that any 1994 return for HGTG would show
losses, which petitioner could not claim because he did not have
sufficient basis. Accordingly, no income or loss from HGTG was
reflected on petitioner’s 1994 return. Based on his above
understanding, Gammon did not inquire about the status of HGTG’s
1994 taxable year or whether a return was to be or had been
filed. Petitioner’s stock in HGTG was worthless as of December
31, 1994.
OPINION
The issues for our consideration in this case require an
analysis of whether any portion of the settlement proceeds
received by petitioner or on his behalf may be excluded from
petitioner’s gross income. First, we consider whether any
portion is excludable under section 104(a)(2). If some portion
is includable, we shall then consider whether petitioner was
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