Nancy and Robert Madsen co-owned and operated the Pit Stop Bar & Grill in Cushing, Wisconsin from 1979 until 1982, when Robert intentionally set the tavern ablaze, destroying the establishment. Nancy had no prior knowledge of her husband's plans, nor any involvement with the arson. On their joint income tax return, she deducted one-half of the loss resulting from the fire as a loss under Tax Code § 165, reasoning that she owned one half of the property destroyed. The Tax Court, however, could find no tax case law or IRS regulations on point, and instead disallowed the deduction on other grounds.

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