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petitioner defaulted, he could file suit to recover any principal
payments made in excess of 25 percent of the purchase price, less
any damages to Jellico. Thus, his recovery in the event of his
default was limited to the excess of his payments over $320,000
($1,280,000 x .25 = $320,000). The contract assured Jellico an
unencumbered title during such a suit.
In October 1998, petitioner could not make the next interest
payment of slightly over $50,000. Petitioner was also in default
with respect to the property taxes on the residence. By this
time, petitioner had made $384,000 in principal payments.
Petitioner contacted Jellico and offered to donate his equity in
the residence to AHERF and vacate the premises. Jellico accepted
the proposal, and petitioner vacated the residence.
B. 2000 Theft Loss Deduction
On his 2000 return, petitioner claimed a theft loss
deduction in the amount of $2,221,668. This loss related to
three pieces of property, two life insurance policies with cash
surrender values of $1,101,000 and $570,768 and a KEYSOP deferred
compensation account which petitioner valued at $550,000.
At the time AHERF terminated petitioner, the premiums of
several life insurance policies, including the two claimed as
theft losses, were paid by AHERF. In return for payment of the
premiums, AHERF maintained a right of corporate recovery on these
policies. This right allowed AHERF to recover the funds paid for
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