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Unformatted text preview: C9-Chp-02-8-Azar-Nut-Case-Cap-Loss.Page 1 of 2Azar Nut Company, Petitioner,Capital loss: Businessexpense deduction: Capital assets definition: “Used in”exception.--, (May 15, 1991)[91-1 USTC ¶50,257](CA-5), U.S. Court of Appeals, 5thCircuit, 90-4462, 5/15/91, Affirming the Tax Court, 94 TC455.[CodeSecs. 162,165and1221]DAVIS, Circuit Judge:Azar Nut Company incurred a loss when it sold a housepurchased from an employee pursuant to an employmentcontract. The Tax Court rejected Azar’s attempt todeduct the loss as an ordinary loss under I.R.C.§165oras an ordinary and necessary business expense underI.R.C.§162. We affirm.I.Azar is in the business of processing, packaging, andmarketing nuts in El Paso, Texas. As owners Edward andPhillip Azar approached retirement age, they decided togradually lessen their management participation in Azar.After a nationwide search for a high level executive tosucceed them, the Azars hired Thomas L. Frankovic asExecutive Vice President and Chief Operating Officer.During contract negotiations, Frankovic insisted that hewould not accept employment with Azar unless Azar agreedto purchase his El Paso residence for its fair market valueupon termination of his employment. Although reluctant tomeet Frankovic’s demand, the Azar brothers were told byother corporate executives in their industry that they wouldnot be able to hire a qualified high-level executive withoutfirst agreeing to purchase his residence at fair market value.Azar ultimately agreed to purchase Frankovic’s El Pasoresidence for its fair market value upon termination of hisemployment, and incorporated that agreement intoFrankovic’s employment contract.1After two years, Azar fired Frankovic and purchased hishouse for $285,000. Azar immediately listed the house, butdid not sell it for almost two years. Azar realizedapproximately $185,000 on the sale and incurred a loss of$111,366.Azar deducted $111,366 as an ordinary and necessarybusiness expense on its 1984 tax return. The Commissionerdisallowed the deduction and assessed a deficiency afterrecharacterizing the loss as a capital loss. Azar petitioned theUnited States Tax Court for a redetermination of thedeficiency. The parties stipulated to the facts. The Tax Courtheld that Azar had incurred a capital loss, thus limitingAzar’s deduction to the extent of Azar’s capital gains. I.R.C.§1211. Azar had no capital gains in 1984. Azar appeals.II.Circuit courts review Tax Court decisions under the samestandard used for civil actions decided by a federal districtcourt. 26 U.S.C.§7482(a). Because the parties stipulated tothe facts of this case, we need not examine the Tax Court’sfactual findings. We may review the Tax Court’s conclusionsof law de novo.Dresser Indus. v. Commissioner[90-2 USTC¶50,505], 911 F.2d 1128, 1132 (5th Cir. 1990)....
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This note was uploaded on 03/09/2012 for the course ACCT 6120 taught by Professor Godfrey,h during the Spring '08 term at UNC Charlotte.
- Spring '08