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Petitioner’s testimony at trial graphically illustrates this
admission:
Q: Okay. But the damage occurred prior to ‘97.
Correct?
A: Yes.
Q: And the foreclosure occurred in ‘96.
A: It started –- yes.
Q: Okay. So there was no event –- no damage or
vandalization in ‘97 that gave rise to the loss?
A: No. The rise to the loss happened in ‘96, not
‘97.
It is clear, therefore, that any casualty or theft loss that
petitioner may have sustained from an unauthorized removal of
furnishings and fixtures from the Hazelwood property was not
sustained in 1997 but in an earlier year(s). See sec. 165(e);
sec. 1.165-1(d)(3), Income Tax Regs; sec. 1.165-8(a)(2), Income
Tax Regs. Thus, not only did petitioner discover the loss, at
the latest, in February or March 1996, but no reasonable prospect
of reimbursement existed at that time that would have served to
defer recognition of the loss to 1997.
Equally unpersuasive is petitioners’ related contention that
the foreclosure of the Hazelwood property was tantamount to a
casualty loss. Rather, the disposition of mortgaged property
at a foreclosure sale is treated as a sale or exchange from which
the mortgagor may realize gain or loss under section 1001. See
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