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Similarly, the $4,056,220 Jenrich note disposition also
lacked economic substance. Among other things, the $4,056,220
Jenrich note did not represent valid indebtedness. We
accordingly hold that petitioner is not entitled to its claimed
note disposition losses of $459,221 and $1,178,012 for its
taxable years ended November 30, 1996 and 1997, respectively.
Finally, on the basis of all of the foregoing, we hold that
petitioner is not entitled to its claimed $404,000 NOL carryover
deduction to its taxable year ended November 30, 1996. That
$404,000 NOL resulted from petitioner’s claiming a $1,982,825
second lease strip deal “rental expense” deduction for its 1995
taxable year.
II. Petitioner’s $2,052,900 Ordinary Loss and $1,859,135 Bad
Debt Deduction
A. Petitioner’s Claimed Deductions--the Debt vs. Equity
Issue
For its taxable year ended November 30, 1997, petitioner
claimed a $2,052,900 ordinary loss and a $1,859,135 bad debt
deduction. These deductions are based upon advances by
petitioner to Cap Corp. through 1997.
Generally, section 165(a) allows a deduction for losses
sustained during the taxable year that are not compensated for by
insurance or otherwise. If stock in a corporation becomes
worthless during a taxable year, the taxpayer’s loss will be
treated as a capital loss. Sec. 165(g)(1). As relevant to this
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