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Petitioner was the sole shareholder of KPS Trucking Co.,
Inc. (KPS), a corporation with 26 employees. He also was a
salaried employee of KPS, managing its daily operations. Before
1996, KPS began experiencing financial difficulties. As a
result, petitioner lent capital to KPS in an attempt to continue
business operations and to pay salaries. Petitioner made six
loans totaling $86,040.
KPS voluntarily filed for bankruptcy under chapter 7 of the
Bankruptcy Code during July 1996, and the bankruptcy proceeding
concluded on December 11, 1996. Petitioner’s loans to KPS were
the lowest in priority amongst the debts for payment, and there
were insufficient assets in the estate to satisfy KPS’s
creditors. Upon the final discharge of KPS’s debts, petitioner’s
loans remained unpaid and were worthless.
Petitioners reported an $84,7344 loss attributable to the
debt due from KPS on Schedule D, Capital Gains and Losses, of
their 1996 return. Schedule D concerns the reporting of capital
asset transactions. Petitioners also deducted the worthless debt
on page 1, line 14 of their 1996 return. Line 14 is denominated
“Other gains or (losses)”. The parties disagree as to the
treatment of the loss for tax purposes. Petitioners now contend
that they should have claimed the bad debt as a deduction on
4 Petitioners deducted $84,734 as a loss on their 1996
return but were able to substantiate $86,040 of loans at trial.
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