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complaint also alleged that Evans fraudulently and without
authority appropriated $30,000 belonging to the Management
Company and requested both punitive and compensatory damages.
The parties settled the Lawsuit. As part of the settlement,
Evans agreed, in exchange for dismissing the Lawsuit, to pay
petitioner $50,000 and to enter into a covenant not to compete
(noncompete agreement). Evans agreed not to engage in any
business activity competing directly with the Clinic within 150
miles of Jefferson County, Kentucky, for 5 years. Petitioner
would pay Evans $40,000 each year during the 5-year noncompete
period, and Evans would assign his interest in these payments to
the Clinic. The settlement further provided that Evans would
resign as an officer of the companies and would agree to have all
his shares in the companies redeemed. Evans’ shares in the
companies were redeemed on April 5, 1996.
Deduction
Petitioners deducted $491,0542 as a business bad debt on
their joint Federal income tax return for 1995. Respondent
issued to petitioners a notice of deficiency on March 26, 2002,
for 1995 (the Notice), in which respondent determined to increase
petitioners’ income for 1995 by the amount petitioners claimed as
a business bad debt deduction. The Notice stated that
petitioners had established neither the amount of the debt nor
that it was a business bad debt. Petitioners timely filed a
2This amount relates to advances petitioner claims to have
made to the Management Company on behalf of Evans.
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