Robert Lee and Rebecca Waters - Page 8

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          Of this amount, $295,000 was claimed for a casualty or theft loss           
          in respect of the Hazelwood property.                                       
               In support of their claimed casualty or theft loss,                    
          petitioners attached Form 4684, Casualties and Thefts, to their             
          return.  In Section B, Business and Income-Producing Property,              
          petitioners computed their claimed loss as follows:                         
               Cost or adjusted basis                    $300,000                     
               Less: insurance or other reimbursement       -0-                       
               Fair market value before casualty/theft    360,000                     
               Fair market value after casualty/theft      65,000                     
               Diminution in fair market value            295,000                     
               Lesser of: cost or adjusted basis or                                   
               Diminution in fair market value         295,000                        
               Casualty or theft loss                     295,000                     

          A.  Loss Deduction5                                                         
               1.  The Parties’ Contentions                                           
               Petitioners contend they are entitled to a casualty or theft           
          loss based on theft of the furnishings and fixtures of the                  
          Hazelwood property and the subsequent foreclosure on the property           
          itself.  Petitioners further contend that they are entitled to              
          deduct the loss in 1997 because that was the year in which they             
          surrendered possession of the Hazelwood property.  In this                  
          regard, petitioners allege that after the foreclosure sale on               

               5 We decide this issue without regard to the burden of                 
          proof.  Accordingly, we need not decide whether the general rule            
          of sec. 7491(a)(1) is applicable to this issue.  See Higbee v.              
          Commissioner, 116 T.C. 438 (2001).                                          

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