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Petitioner began further collection efforts in 1995.
Petitioner first unsuccessfully demanded payment from Brooks
Foods. Petitioner then filed a lawsuit against Brooks Foods and
Peggy Ann Hauser (Ms. Hauser), Mr. Hauser’s widow, to attempt to
recover the debt. Ms. Hauser’s attorneys responded by a letter
to petitioner in February 1995, stating that the suit against Ms.
Hauser should be dismissed as she had no active involvement in
Brooks Foods. In addition, the letter stated that secured
creditors or other parties who became shareholders before Mr.
Hauser’s death had control over all the stock of Brooks Foods.
Petitioner could not recall the outcome of the litigation at the
time of trial in this case, but he believed it had gone to court
and was apparently unsuccessful. Ms. Hauser later filed
bankruptcy and received a discharge in 1998.
Petitioner reported Egan Oil’s income and expenses using the
accrual method on a Schedule C, Profit or Loss from Business, for
1998. Petitioner deducted $158,381 in 1998 as a business bad
debt attributable to Brooks Foods. Petitioner reported taxable
income of $7,442 and tax of $1,052.
Petitioner claimed that Brooks Foods owed $420,000 in total
to Egan Oil and that $200,000, represented by the notes, was
secured. Petitioner’s accountant, Emile Rabinowitz (Mr.
Rabinowitz), advised petitioner to deduct $158,381, but neither
petitioner nor Mr. Rabinowitz explained how they computed this
amount. At the time of trial, petitioner no longer had records
or business ledgers for 1992 through 1995 reflecting deliveries
to, or accounts receivable from, Brooks Foods. Mr. Rabinowitz
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