Melvin D. Lee - Page 4

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          Peach Tree Property                                                         
               Beginning in 1991, petitioner rented out real property he              
          owned in Penryn, California (Peach Tree Property).  In 1997                 
          petitioner sold the Peach Tree Property for $235,000.                       

          Dejanu Loan                                                                 
               In mid-1994, petitioner made two loans to a friend of his by           
          the name of Peter Dejanu (Dejanu), which loans totaled $15,000.             
          The loans were to be repaid by Dejanu with interest 30 days from            
          the date each loan was made.  Dejanu did not repay the loans.               
          Petitioner attempted to obtain repayment of the loans from Dejanu           
          on approximately a weekly or biweekly basis from the due date in            
          1994 until some time in 1997.                                               
               In 1997, petitioner discovered that Dejanu was essentially             
          insolvent and was seeking funds from other individuals.  After              
          discovery of Dejanu’s desperate financial situation, and his                
          unsuccessful collection efforts and the length of time his loans            
          to Dejanu had been in default, petitioner concluded that the                
          Dejanu loans were uncollectible, and petitioner ceased collection           
          activities.  Petitioner did not recover any principal or interest           
          on the Dejanu loans.                                                        

          Tax Return and Respondent’s Audit                                           
               On June 20, 1999, petitioner untimely filed with respondent            
          his 1997 individual Federal income tax return, on which                     

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