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in 1995 he did not believe Stephanie would be able to make
payments on his debt, and that it was worthless.3
Petitioner also had conversations with David about the debt.
Petitioner testified credibly that he believed that, even though
David was honest and wanted the debt paid, he did not have the
means to make payments. Petitioner also consulted a real estate
broker concerning the value of the Atascadero property.
Petitioner took a deed in lieu of foreclosure to protect his
security interest and to salvage part of the debt he was owed.
In addition to Stephanie’s and David’s inability to pay,
petitioner’s decision that the debt was worthless was based on
section 580b of the California Code of Civil Procedure.
Petitioner believed that section 580b barred him from pursuing an
action to recover the outstanding balance from either Stephanie
or David. Section 580b provides that no deficiency judgment may
be obtained--
after a sale of real property * * * for failure of the
purchaser to complete his contract of sale, or under a
deed of trust * * * or mortgage * * * given to the
vendor to secure payment of the balance of the purchase
price of that real property, * * * or under a deed of
trust * * * or mortgage * * * on a dwelling for not
more than four families given to a lender to secure
3Petitioner did not claim a bad debt deduction on his 1995
return. Even though he believed the debt was worthless in 1995,
petitioner was under the mistaken impression that the proper tax
treatment of the worthless debt was to account for it as part of
his basis in the Atascadero property. Petitioner’s
misunderstanding of the proper tax treatment does not alter our
conclusion that he reasonably believed the debt was worthless in
1995.
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