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the earthquake and homeowner’s insurance and the property taxes
on the Atascadero property in November 1995. On December 29,
1995, petitioner sold the Atascadero property to Bryan Dunnivan
for $200,286. Mr. Dunnivan took the property subject to the
Great Western first deed of trust and gave petitioner a note for
$32,000 secured by a deed of trust to the Atascadero property.
On December 29, 1995, Stephanie sold her Oakland home. In
1995, Stephanie also purchased a house in Dallas, Texas, which
she sold in 1996 for a gain of $45,401. Stephanie earned $87,148
and $100,744 in 1995 and 1996, respectively.
On his 1995 Federal income tax return, petitioner reported
the $170,371 early distribution in gross income and calculated a
tax of $17,037 for an early distribution under section 72(t).
Petitioner claimed a $136,331 short-term capital loss from the
sale of the Atascadero property. Petitioner calculated a
$336,331 basis in the property, consisting of $170,371, the
amount owed him by Stephanie and David when he took the deed in
lieu of foreclosure, plus $168,957, the amount outstanding on the
note held by Great Western. Petitioner acknowledges but does not
explain the $2,997 difference between the basis he claimed on his
return, $336,331, and the sum of the two amounts he used to
calculate the basis, $339,328 ($170,371 + $168,957).
Petitioner did not claim any deduction for a worthless debt
on his 1995 return. In response to respondent’s denial of the
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