§166 — Bad debts

Such debts do not constitute ‘bad debts’ within the meaning of section 166 for which a deduction for worthlessness may be claimed.”).

money, your bad debt deduction was disallowed.” Thus, by its terms, the FPAA did not disallow AAM’s bad-debt deduction on the grounds that the 43 [*43] Treasury Regulation § 1.166-1(c) provides: “Only a bona fide debt qualifies for the purposes of section 166. A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money.” The U.S. Court of Appeals for the Ninth Circuit, to which appeal of th

Section 166 Section 165 permits an individual a deduction for a loss sustained during the taxable year, if the loss (1) is not compensated for by insurance or otherwise and (2) is incurred in a trade or business or any transaction entered into for profit, or arises from fire, storm, shipwreck, or other casualty, or from theft. § 165(a), (c). Section 165(g) provides special rules for worthless securities. Section 166 permits a deduction for a bona fide debt that becomes worthless within the taxab

Kathleen Stegman’s Bad Debt Expense Section 166 provides in general that taxpayers are allowed a deduction for a debt that becomes worthless within the taxable year.

Huffman case, the parties agree that Chet (now deceased) and Cindy are (1) entitled to deduct losses on Schedules E, Supplemental Income and Loss, of $580,310 and $379,481 for 2008 and 2009, respectively; (2) not entitled to a section 166 bad debt deduction of $571,000 nor a $571,000 capital loss deduction for 2008; (3) not entitled to a section 170 charitable contribution deduction of $120,000 for 2008; and (4) not subject to an increase in ordinary dividend income of $120,000 from Dukes for 20

of the partnership’s Schedule M–3 (−$125,568,354 + $46,506,023 + $103,852,672 = $24,790,341). The FPAA describes the 15 [*15] interest writeoff deduction as having been disallowed because it had “not been substantiated or shown to be allowed under I.R.C. § 166.”9 The 2009 FPAA determined that YA Global owed section 1446 withholding tax for the year of $6,748,616. In computing that amount, respondent determined that all of the partnership’s ordinary business income was effectively connected taxa

Taxpayers must prove the amount and existence of the debt and that the debt became worthless during the taxable year. Am. Offshore, Inc. v. Commissioner, 97 T.C. 579, 593 (1991). Respondent disallowed HPPO’s bad debt deduction for each year at issue in its entirety. He argues that HPPO had not previously reported the amount of the debt as in

Tests for Evaluating Debt Versus Equity Petitioners assert that all of the advances made to the purported debtors were bona fide business debts pursuant to section 166(a)(1).

money.” Zimmerman v. United States, 318 F.2d 611, 612 (9th Cir. 1963) (quoting Treas. Reg. § 1.166-1(c)); Kean v. Commissioner, 91 T.C. 575, 594 (1988); Treas. Reg. § 1.166-1(c). A contribution to capital is not con- sidered a “debt” for purposes of section 166. Kean, 91 T.C. at 594. Whether an advance of funds is treated as genuine debt “must be considered in the context of the overall transaction.” Hardman v. United States, 827 F.2d 1409, 1411 (9th Cir. 1987). Our inquiry typically fo- cuses o

in 2013 and 2014 or to distinguish between repairs and maintenance done to areas used by Palmarini Inc. or areas occupied by residential tenants. 3. Bad debt Section 166(a) grants a taxpayer a deduction for any bona fide debt that becomes wholly or partially worthless within the taxable year.

stating that “the whistleblower claim was fully investigated” and “no change was proposed.” But he indicated that he had identified another issue, namely a deduction in excess of $60 million that Target had claimed “for intercompany bad debt.” See sec. 166. He stated that the bad debt issue would take some time to examine but that it was “unrelated to the subject of the whistleblower claims.” Ms. Beardsley decided to keep the case open until the RA finished his further investigation. In 2013 th

Section 166, captioned "Bad Debts," allows a deduction for any debt that "becomes [wholly] worthless" or becomes "recoverable only in part" during the taxable year. Sec. 166(a). Section 166(e), however, provides that "[t]his section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C)." Because non-REMIC ass

OPINION Section 166(a) generally allows taxpayers to deduct "any debt which becomes worthless within the taxable year." For a section 166 worthless business debt deduction, taxpayers must show: (1) the deducted amount represents a bona fide debt, (2) the debt became worthless during the year, and (3) the debt was incurred in connection with a trade or business.

166(a), (d)(1). For a nonbusiness bad debt held by a taxpayer other than a corporation, section 166(a) does not apply, and the taxpayer is allowed a short-term capital loss for the year in which the debt becomes worthless.

Section 166, captioned "Bad Debts," allows a deduction for any debt that "becomes [wholly] worthless" or becomes "recoverable only in part" during the taxable year. Sec. 166(a). Section 166(e), however, provides that "[t]his section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C)." Because non-REMIC ass

Section 166 allows a deduction for debts which become worthless during the taxable year. Petitioners' submitted QuickBooks records related to their accounts receivable for 2009, 2010, and 2012; however, these documents do not establish any amount ofuncollectible accounts receivable. There is nothing else in the record to explain how petitioners cal

debt became worthless. Davis v. Commissioner, 88 T.C. 122, 142 (1987), affd, 866 F.2d 852 (6th Cir. 1989). Respondent contends that petitioner has failed to establish any ofthese elements in this case. Only a bona fide debt qualifies for purposes ofsection 166. "A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid - 20 - and enforceable obligation to pay a fixed or determinable sum ofmoney." Sec. 1.166-1(c), Income Tax Regs.6 Generally, a debtor-credito

Section 166 allows a deduction for debts which become worthless during the taxable year. Petitioners' submitted QuickBooks records related to their accounts receivable for 2009, 2010, and 2012; however, these documents do not establish any amount ofuncollectible accounts receivable. There is nothing else in the record to explain how petitioners cal

Section 166 allows a deduction for debts which become worthless during the taxable year. Petitioners' submitted QuickBooks records related to their accounts receivable for 2009, 2010, and 2012; however, these documents do not establish any amount ofuncollectible accounts receivable. There is nothing else in the record to explain how petitioners cal

d to establish that the 2011 advances constituted a bona fide debt and that the parties intended to create a bona fide debtor-creditor relationship. See sec. 1.166-1(c), Income Tax Regs. ("Only a bona fide debt - 11 - [*11] qualifies for purposes ofsection 166. A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum ofmoney."). Generally a debtor- creditor relationship exists ifthe debtor genuine

For a section 166 worthless debt deduction, taxpayers must show: (1) the transfer created a valid debt and was not equity contributions, (2) the debt became worthless during the year, and (3) the debt was incurred in connection with a trade or business. Sensenig v. Commissioner, T.C. Memo. 2017-1, at *17-*18; sec. 1.166-1(c), Income Tax Regs. A worthless

Consequently, remaining for resolution are the following three issues: (1) whether Marlin may deduct, pursuant to section 166, allegedly bad debts arising from Brazilian consumer receivables of$4,850,000 for 2004; (2) whether Derringer 5Mr.

For a section 166 worthless debt deduction, taxpayers must show: (1) the transfer created a valid debt and was not equity contributions, (2) the debt became worthless during the year, and (3) the debt was incurred in connection with a trade or business. Sensenig v. Commissioner, T.C. Memo. 2017-1, at *17-*18; sec. 1.166-1(c), Income Tax Regs. A worthless

For a section 166 worthless debt deduction, taxpayers must show: (1) the transfer created a valid debt and was not equity contributions, (2) the debt became worthless during the year, and (3) the debt was incurred in connection with a trade or business. Sensenig v. Commissioner, T.C. Memo. 2017-1, at *17-*18; sec. 1.166-1(c), Income Tax Regs. A worthless

Only a bona fide debt qualifies for purposes ofsection 166; bona fide debt is a debt that arises from "a debtor-creditorrelationship based upon a valid and enforceable obligation to pay a fixed or determinable sum ofmoney." Kean v.

For a section 166 worthless debt deduction, taxpayers must show: (1) the transfer created a valid debt and was not equity contributions, (2) the debt became worthless during the year, and (3) the debt was incurred in connection with a trade or business. Sensenig v. Commissioner, T.C. Memo. 2017-1, at *17-*18; sec. 1.166-1(c), Income Tax Regs. A worthless

For a section 166 worthless debt deduction, taxpayers must show: (1) the transfer created a valid debt and was not equity contributions, (2) the debt became worthless during the year, and (3) the debt was incurred in connection with a trade or business. Sensenig v. Commissioner, T.C. Memo. 2017-1, at *17-*18; sec. 1.166-1(c), Income Tax Regs. A worthless

Petitioners contend that they are entitled to deduct ordinary losses and NOL carryforwards and carrybacks for business bad debts pursuant to section 166. Respondent contends that petitioners' advances to Prime or others for thejoint venture properties and the advances to DHP and Szigeti do not satisfy the requirements for deductible business bad debts under section 166. I. Business Bad Debt Deductions Deductions are a matter oflegislative grace, and taxpayers bear the burden ofproving their enti

Consequently, remaining for resolution are the following three issues: (1) whether Marlin may deduct, pursuant to section 166, allegedly bad debts arising from Brazilian consumer receivables of$4,850,000 for 2004; (2) whether Derringer 5Mr.

is returns for the 2008, 2009, and 2010 tax years. The same CPA also prepared amended returns for his 2003, 2004, and 2005 tax years. This CPA advised Owens that his loss on the loan with Lohrey Investments entitled him to a bad-debt deduction under section 166. Owens took this advice and claimed a $9.5 million bad-debt loss expense on his 2008 tax return. On the advice ofhis CPA, he also claimed an NOL carryforward for the 2009 and 2010 tax years and amended his 2003, 2004, and 2005 tax years t

Business Bad Debt Deduction Section 166(a)(1) provides that "[t]here shall be allowed as a deduction any debt which becomes [wholly] worthless within the taxable year." For a nonbusi- ness bad debt held by a taxpayer other than a corporation, section 166(a)(1) does not apply, and the taxpayer is allowed a short-term capital loss for the taxable year - 9 - [*9] in which the debt becomes completelyworthless.

ate use, and we are not obligated to accept Mr. Kohn's uncorroborated and self-serving testimonyto that effect.26 See Tokarski v. Commissioner, 87 T.C. 74, 25Petitioners alternatively argue that the contested business expenses may be deducted under sec. 166 as bad debts. Because petitioners are claiming to have been the borrowers with respect to the American Bank loan, and the record establishes that they borrowed money from Lindell to finance the bulk ofMr. Kohn's contribution of$55,000 to the

Governing Statutory Framework Section 166(a)(1) allows as a deduction any bona fide debt that becomes worthless within the taxable year. For a nonbusiness bad debt held by a taxpayer other than a corporation, section 166(a)(1) does not apply, and the taxpayer is allowed a short-term capital loss for the taxable year in which the debt becomes completely worthless.

- 5 - [*5] The issues for consideration are: (1) whether petitioner is entitled to related-party bad debt deductions under section 166 for tax years 2004 and 2006- 13; (2) whether alternativelypetitioner is entitled to business expense deductions under section 162 for the tax years at issue; (3) whether alternatively petitioner is entitled to recoup taxes paid for closed tax years on amounts it advanced to related parties; (4) whether alternatively petitioner is entitl

t and do not decide the issue ofwhether (ifthey had been debt) they would have been nonbusiness debt and whether section 166(d) would apply to limit the deduction. -19- [*19] Regs. By definition, a capital contribution is not a debt for purposes of section 166. See 26 C.F.R. sec. 1.166-1(c). The question now before us is whether Mr. Sensenig proved that CLCL's advances to G-L, LFP, and WSC were loans (giving rise to debts) or instead were equity investments. 1. Frequent complexities As we will l

- 5 - [*5] The issues for consideration are: (1) whether petitioner is entitled to related-party bad debt deductions under section 166 for tax years 2004 and 2006- 13; (2) whether alternativelypetitioner is entitled to business expense deductions under section 162 for the tax years at issue; (3) whether alternatively petitioner is entitled to recoup taxes paid for closed tax years on amounts it advanced to related parties; (4) whether alternatively petitioner is entitl

The Bad Debt Deduction Section 166(a)(1) provides that "[t]here shall be allowed as a deduction any debt which becomes [wholly] worthless within the taxable year." For a nonbusi- ness bad debt held by a taxpayer other than a corporation, section 166(a)(1) does not apply, and the taxpayer is allowed a short-term capital loss for the taxable year in which the debt becomes completelyworthless.

less securities because the loans did not satisfy the requirements ofsec. 165(g)(2)(c) as they were not in registered form and did not have any interest stated. It is also not likely petitioner could have claimed a deduction for worthless debt under sec. 166 because there is no indication she tried to collect on the debts at all. See Brewer v. Commissioner, T.C. Memo. 1992-530. - 23 - [*23] Next, respondent also introduced evidence showing that petitioner had two bank accounts with the Bank ofMo

1.166-1 through 1.166-3, 1.166-5, Income Tax Regs. Or ifthe advances were capital contributions, then petitioners might be entitled to a capital loss deduction in the future iftheir stock becomes worthless. S_e_e sec. 165(g); sec. 1.165-5, Income Tax Regs.; see also secs. 1211 and 1212. But at trial petitioners made clear that CODES

less securities because the loans did not satisfy the requirements ofsec. 165(g)(2)(c) as they were not in registered form and did not have any interest stated. It is also not likely petitioner could have claimed a deduction for worthless debt under sec. 166 because there is no indication she tried to collect on the debts at all. See Brewer v. Commissioner, T.C. Memo. 1992-530. - 23 - [*23] Next, respondent also introduced evidence showing that petitioner had two bank accounts with the Bank ofMo

The Bad Debt Deduction Section 166(a)(1) provides that "[t]here shall be allowed as a deduction any debt which becomes [wholly] worthless within the taxable year." For a nonbusi- ness bad debt held by a taxpayer other than a corporation, section 166(a)(1) does not apply, and the taxpayer is allowed a short-term capital loss for the taxable year in which the debt becomes completelyworthless.

But the debtor wins the lottery in February 2001 and repays the debt. Remember that in this second hypothetical, th taxpayer was getting a deduction for unrepaid principal. The return ofprincipal is generally not includible in taxable income. See, e.g., Nat'l Bank ofCommerce ofSeattle v. Commissioner, 115 F.2d 875, 876 (9th Cir. 1940), 40

On the basis ofthese facts and circumstances, we hold that Mr.

ner, T.C. Memo. 1995-100; sec. 1.165-4(a), Income Tax Regs. 24Goran v. Commissioner, T.C. Memo. 1995-100. - 21 - [*21] D. Bad Debt Deduction The other plausible theory is that Mr. Espaillat and Ms. Lizardo are entitled to a bad debt deduction under section 166. Much ofthe evidence supports the notion that Mr. Espaillat's transfers to Rocky Scrap Metal or Leoncio were loans. Nonetheless, even a bona fide loan to Rocky Scrap Metal would not entitle Mr. Espaillat and Ms. Lizardo to a deduction. Sec

The issues for decision are: (1) whetherpetitioners failed to report cancellation ofindebtedness income (COD income); (2) whetherpetitioners are entitled to a business bad debt deduction under section 166; and (3) whetherpetitioners are liable for the section 6662(a) accuracy-relatedpenalty.

Section 166(a)(1) allows as a deduction any bona fide debt that becomes worthless within the taxable year. For nonbusiness bad debt held by a taxpayer other than a corporation, section 166(a)(1) does not apply, and the taxpayer is allowed a short-term capital loss for the taxable year in which the debt becomes completely worthless.

But the debtor wins the lottery in February 2001 and repays the debt. Remember that in this second hypothetical, the taxpayer was getting a deduction for unrepaid principal. The return of principal is generally not includible in taxable income. See, e.g., Nat’l Bank of Commerce of Seattle v. Commissioner, 115 F.2d 875, 876 (9th Cir. 1940)

Section 166, captioned “Bad Debts,” allows a deduction for any debt that “becomes [wholly] worthless” or becomes “recoverable only in part” during the taxable year. Sec. 166(a)(1) and (2). Section 166(e), however, provides that “[t]his section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C).” Because no

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

Section 166 allows a deduction for debts that become wholly or partially worthless during the taxable year. The debt must arise from a debtor-creditorrelationship. See Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980); sec. 1.166-1(c), Income Tax Regs. In addition, "[w]orthless debts arising from unpaid wages, salaries, fees, rents, and

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

ing to Mr. Dickinson, those worthless loans constitute bad debts that are not nonbusiness bad debts under section 166(d)(2) and that are deductible under section 166(a) for his taxable year 2007. Only a bona fide debt qualifies as debt forpurposes ofsection 166. A bona fide debt is a debt that arises from a debtor-creditorrelationship based upon a valid and enforceable obligation to pay a fixed or determinable sum ofmoney. Sec. 1.166-1(c), Income Tax Regs. Whether a bona fide debtor-creditorrela

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We also found that petitioner failed to establish there was any debt for section 166 purposes.

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold thatpetitioner was not.

We hold that he is not.

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

roduct, and it used Ps' loans in part to fund the development ofthe SERVED SEP 2 3 2014 - 2 - new product. In 2008 the Indian company abandoned its development ofthe new product. Ps claimedthat X was insolvent and claimed a bad debt deduction under I.R.C. sec. 166 of$2,046,570 for 2008. R determined that (1) the royaltypayments P-H received from T did not qualify for capital gain treatment; (2) the engineering expenses were the ordinary and necessary expenses ofa related corporation and Ps were

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

ased upon a valid and enforceable obligation to pay a fixed or determinable amount ofmoney. Kean v. Commissioner, 91 T.C. 575, 594 (1988); sec. 1.166-1(c), Income Tax Regs. A gift or contributionto capital maynot be considered a debt for purposes ofsection 166. Sec. 1.166-1(c), Income Tax Regs. -14- [*14] A contribution to capital in this instance would be in the form ofajoint venture. Ajoint venture is "'an association ofpersons to carry out a single business enterprise for profit'". Beck Chem.

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

We hold for respondent on all issues.9 FINDINGS OF FACT The parties' stipulation offacts, supplemental stipulation offacts, and second supplemental stipulation offacts, all with the facts found from the accompanying exhibits, are incorporatedherein by this reference, as are all stipulations ofsettled issue

("Section 166 provides that - 24 - [*24] * * * a deduction shall be allowed in respect ofbad debts owed to the taxpayer.").

nership for Federal income tax purposes. Held, further, S had a cost basis, not a carryoverbasis, in the receivables. - 3 - Held, further, the transactions in issue lacked economic substance. Held, further, the trading companies are not entitled to I.R.C. sec. 166 deductions. Held, further, Mr. and Mrs. Rogers purchased their beneficial interest in the subtrust and are not entitled to a carryoverbasis. Held, further, R properly disallowedthe Rogerses' claimed I.R.C. sec. 166 deduction. Held, fur

a nonbusiness bad debt for 2008 pursuant to section 166; and (4) whether petitioners are liable for section 6662(a) accuracy-related penalties for the years at issue.

--- MAJORITY --- Wherry, Judge: In 2003 John Rogers developed, marketed, and sold investments, which also allegedly provided potential tax shelter, whereby investors in a partnership structure could claim partially worthless bad debt deductions under section 166 on certain distressed assets formerly owned by a Brazilian retailer.

mbursements were received. The IRS argues that the advanced expenses that HFM deducted were in the nature ofloans to its clients and that, therefore, HFM was entitled only to bad-debt deductions for unreimbursed expenses once cases were closed.8 See sec. 166. We sustain the IRS's position for the reasons stated below. A. The Parties Dispute the Test for Deductibility. The parties have differing views on the legal test for determining whether advanced expenses by law firms are deductible. HFM arg

es to Main Trust. S, Main Trust, and the trustee in turn allocated the receivables to Sub-Trust. E transferred cash to Main Trust in exchange for the entire beneficial interest in Sub-Trust. E wrote offmost ofthe value ofthe receivables as an I.R.C: sec. 166 bad debt deduction, claiming a carryover basis in the receivables equal to S' basis. R issued a notice offinal partnership administrative adjustment regarding S' 2004 and 2005 taxable years. R made adjustments to S' income on a number of the

Section 166 bad debt deduction A. Bona fidé debt Section 166(a)(1) allows as a deduction any bona fide debt that becomes worthless within the taxable year. For nonbusiness bad debt held by a taxpayer other than a corporation, section 166(a)(1) does not apply, and the taxpayer is allowed a short-term capital loss for the taxable year in which the debt becomes completely worthless.

The investors in these sub-trusts reported on their individual tax returns section 166 bad debt deductions relating to the consumer receivables.

Petitioner states that several alleged loans, extended in his individual capacity or through his wholly owned company, Fred Deutsch Co., became unrecoverable at various nonspecified periods in the 1990s, permitting him bad debt deductions pursuantto section 166. For his taxable year 2004 petitioner alleges that he was entitled to an NOL deduction for bad debts arising from the following purportedlyunrecoverable loans: Debtor Aaaregate amount 270 Lafayette Associates, LP $1,142,527 285 Lafayette

The allowance ofa deduction under section 166 requires thatthe debt to which the deductionrelates was a valid debt and that the taxpayer claiming the deduction was the creditor.4 Respondent does not necessarily agree that petitioner 4The record is less than clear with respect to whether petitioner or Mrs.

7491(a)(2); see also Rule 142(a)(2).

Only a bona fide debt qualifies for the bad debt deduction. Sec. 1.166-1(c), Income Tax Regs. The distinction between a business bad debt and a nonbusiness bad debt is important because business bad debts offset income dollar-for-dollar, see sec. 166(a), (d)(1)(A), while a nonbusiness bad debt is treated as a loss arising from the sale or

Bad Debt Deductions Section 166(a) provides as a general rule that a deduction shall be allowed for "any debt which becomes worthless within the taxable year." Section 166 distinguishes business bad debts from nonbusiness bad debts.

1999-183 (listing factors considered, including demands for repayment and parties' records, in determining whether advances made to the son of a close corporation's president were bona fide debt for purposes of a section 166 bad debt deduction).

Section 166 (c) (3) allows as a deduction to an individual certain losses commonly referred to as casualty losses . A casualty loss is allowable to a taxpayer for a loss of property not connected with a trade or business or at transaction entered into for profit if the loss results from "fire, storm, shipwreck, or other casualty". See id. Pursuant

And third, for 2005 tl e Ramigs claim that they are entitled to deduct under section 166 the following amounts for worthless debts: (i) $29,600 for the unpaid principal of four purported promissory notes, (ii) $11,331.40 for expenses paid by credit card," (iii) $2, 500 they purportedly paid to General Motors Acceptance Corporation, and (iv) $2,700 paid to Puget Sound Leasing.1° As we explain below, the Ramigs are entitled t

Dagres is entitled to a $3,635,218 business bad debt deduction for 2003 pursuant to section 166(a); and (2) Mr.

Similarly, petitioner's claim of a worthless debt under section 166 cannot be allowed .

In the case of a noncorporate taxpayer, section 166 permits a deduction for a business debt that becomes worthless during the taxable year .

After concessions,3 the issues for decision are whether petitioners are, entitled to : (1) A bad debt deduction under section 166 of $382,000 ; (2) a capital loss deduction for a worthless .

ause petitioner included an adjustment in income of $383,237 that should have been $75,017 and (2) petitioner should have eported aggregate Schedule M-1 adjustments decreasing taxable income by $62,473 and a Schedule M-1 adjustment decreasing taxable income by $13,403, rather than aggregate Schedule M-1 adjustments.of $973,729, thus decreasing the section 166 bad debt deduct on by $924,659.

Section 166 allows a taxpayer to deduct a bad debt under that section where the taxpayer establishes : (1) A valid debtor-creditor relationship, (2) a bona fide debt created or acquired in connection with a trade or business, (3) the amount of the debt, (4) the worthlessness of the debt, and (5) the year in which the debt became worthless . See sec

An Adjustment for Writeoffs The KPMG model incorporates a section 166, Schedule M-i adjustment for book/tax basis differences in receivables writte n off by recognizing an additional and proportional amount o f income to offset the portion of the writeoff expense that had no t been previously accrued in income .

Petitioner does not contend that it is entitled to a bad debt deduction with respect to these debts and has offered no proof that the debts were wholly or partially worthless so as to meet the requirements under section 166 for claiming a bad debt deduction .

Section 166(d)(1)(B) provides that, where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale-or exchange, during the taxable year, of a capital asset held for not more than 1 year .

Bad Debts From Sales or Services' In the case of a noncorporate taxpayer , section 166 permits a deduction for a business debt that becomes worthless during the taxable year .

Petitioner does not contend that it is entitled to a bad debt deduction with respect to these debts and has offered no proof that the debts were wholly or partially worthless so as to meet the requirements under section 166 for claiming a bad debt deduction.

An Adjustment for Writeoffs The KPMG model incorporates a section 166 Schedule M— 1 adjustment for book/tax basis differences in receivables written off by recognizing an additional and proportional amount of income to offset the portion of the writeoff expense that had not been previously accrued in income.

Bad Debt Deduction Section 166 allows an individual a deduction from ordinary income for any business debt that becomes wholly or partially worthless during the taxable year .

Section 166 allows a taxpayer a deduction for any business debt which becomes wholly or partially worthless during the - 11 - taxable year. Sec. 166(a), (d)(1)(A). A bona fide debt is one that arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. Sec. 1.166-1(c), Incom

Accordingly, petitioners are entitled to a nonbusiness bad debt deduction pursuant to section 166(d).

Fees for services by Barad that allegedly were owed by the City have never been included in income, and unpaid amounts, even if earned, do not constitute "bad debts" within the meaning of section 166 for which a deduction for worthlessness may be claimed.

ebt and that petitioners are entitled to a deduction.12 11The parties stipulated that petitioner was the sole shareholder of the corporation. 12Petitioners do not specify whether the claimed deduction constitutes a sec. 165 theft loss deduction or a sec. 166 bad debt deduction. - 15 - With respect to the liens on the Southampton property, petitioners have presented no evidence that Ms. Smith unlawfully appropriated petitioner’s property intending to deprive him of it. Consequently, we hold that

General Rules Under Section 166 Whether a debt has become partially worthless is a facts and circumstances determination.

Worthless debts arising from claims of unpaid compensation are not deductible under section 166 unless the income in question was reported on the taxpayer’s income tax return for the year for which the bad debt deduction is claimed or for a prior taxable year.

As a result, petitioners are not entitled to a section 166 worthless debt deduction.

Overview Petitioners argue primarily that HEI’s transfers to ALSL created debt which became uncollectible in HEI’s 1997 taxable year, thus for that year entitling HEI to a bad debt deduction under section 166.5 Alternatively, petitioners argue, the transfers were HEI’s contribution to the capital of ALSL, which entitled HEI for its 1997 taxable year to deduct an ordinary loss resulting from a loss of that capital.

to a business expense deduction under section 162(a) for expenditures made on behalf of Intercontinental Trading Group, Inc.; (2) in the alternative, whether petitioners are entitled to a loss deduction under section 165 or bad debt deduction under section 166 relating to those expenditures; and (3) whether 1 Petitioners claimed a deduction of $30,067.59 on a Schedule C, Profit or Loss From Business, attached to their jointly filed Form 1040, U.S.

In situations where both sections might otherwise be applicable, section 166-- the specific statute--controls over section 165--the general statute.

2Petitioner conceded respondent’s disallowance of (continued...) -2- are asked to decide whether petitioner is entitled to deduct $158,381 as a business bad debt in 1998 under section 166 and whether the accuracy-related penalty under section 6662(a) should apply.

Although the term “worthless” in section 166 has been interpreted strictly to include only debts that are “wholly -242- worthless”, see sec.

Overview Petitioners argue primarily that HEI’s transfers to ALSL created debt which became uncollectible in HEI’s 1997 taxable year, thus for that year entitling HEI to a bad debt deduction under section 166.5 Alternatively, petitioners argue, the transfers were HEI’s contribution to the capital of ALSL, which entitled HEI for its 1997 taxable year to deduct an ordinary loss resulting from a loss of that capital.

7491(a)(2)(B); Rule 142(a).1 Petitioner contends that she is entitled to a section 166 bad debt deduction relating to the note.

The Court disagrees that such a payment would constitute a bad debt within the meaning of section 166.

Conclusion Upon consideration of the above factors, we hold that the monetary transfers to Border from Mr.

Therefore, we hold that petitioner is not entitled to an alimony deduction for payments totaling $34,352 that he made to Ms.

herwise allowable, are allowed to the taxpayer to whom the debt is owed. See Sundby v. Commissioner, T.C. Memo. 2003-204. In this case, petitioners cannot claim their unreimbursed employee deduction of the $50,000 loan as a bad debt deduction under section 166. The record also does not contain any evidence indicating a personal loan of $50,000 from petitioners to KOA. They are not the taxpayers to whom the debt is owed. Indeed, KOA did not report any loans from shareholders in its 1999 corporate

1.166-1(e), Income Tax Regs., which provides: Worthless debts arising from unpaid wages, salaries, fees, rents, and similar items of taxable income shall not be allowed as a deduction under section 166 unless the income such items represent has been included in the return of income for the year for which the deduction as a bad debt is claimed or for a prior taxable year.

Treatment of the Bad Debt Section 166 provides that a business bad debt is deductible as an ordinary deduction for the year in which the debt becomes worthless.

The issues for decision are whether petitioner is entitled to a deduction under section 166 for a bad debt loss in 1999; whether petitioner is entitled to an interest expense deduction under section 163; whether petitioner is liable for the addition to tax for failure to file under section 6651(a)(1); and whether a penalty should be awarded to the United States under section 6673 by reason of petitioner’s failure to exhaust hi

The regulations under section 166 provide in relevant part: Worthless debts arising from unpaid wages, salaries, fees, rents, and similar items of taxable income shall not be allowed as a deduction under section 166 unless the income such items represent has been included in the return - 4 - of income for the year for which the deduction as a bad debt is claimed or for

This view would require petitioner to prove, inter alia, that: (1) A bona fide debt existed; (2) the debt became worthless; and (3) worthlessness occurred during the taxable year in issue. See secs. 1.166-1(a), (c), and 1.166-2(a) through (c), Income Tax Regs. Petitioner’s testimony at trial, if accepted at face value, might suffice to pr

On their Schedule C, petitioners also claimed a $58,067 section 166 bad debt loss, which allegedly includes the theft of business equipment and unpaid amounts owed to petitioner for his services.

Petitioner and respondent filed cross-motions for partial summary judgment under Rule 1211 on the issue of whether, for purposes of claiming a bad debt deduction under section 166, petitioner is entitled to increase its regular adjusted cost basis in certain mortgages acquired before January 1, 1985, for unpaid interest which accrued during the period that petitioner was tax exempt.

Petitioner and respondent filed cross-motions for partial summary judgment under Rule 1211 on the issue of whether, for purposes of claiming a bad debt deduction under section 166, petitioner is entitled to increase its regular adjusted cost basis in certain mortgages acquired before January 1, 1985, for unpaid interest which accrued during the period that petitioner was tax exempt.

This issue turns on whether, for purposes of section 166, certain fund transfers that petitioner made to Blackland Investment Co., Inc.

his business. Discussion Petitioners bear the burden of proving that they are entitled to their claimed bad debt deduction. Rule 142(a);4 INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). To avail themselves of a bad debt deduction pursuant to section 166,5 4Sec. 7491 does not apply in the instant case to shift the burden of proof to respondent because petitioners neither alleged that sec. 7491 was applicable nor established that they fully complied with the requirements of sec. 7491(a)(2).

Petitioner and respondent filed cross-motions for partial summary judgment under Rule 121 on the issue of whether, for purposes of claiming a bad debt deduction under section 166, petitioner is entitled to increase its regular adjusted cost basis in certain mortgages acquired before January 1, 1985, for unpaid interest which accrued during the period that petitioner was tax exempt.

For example, petitioners have not argued that they are entitled to a worthless stock deduction under section 165(g), that the loss represents a deductible bad debt under section 166, or any other theory.

389 (1978), - 8 - or as a bad debt under section 166, Arrigoni v.

Whether petitioner is entitled to certain bad debt deductions under section 166 claimed on his 1994 return.

he guaranty for a business purpose so as to entitle him to a business expense deduction pursuant to sec. 162. Moreover, petitioner has not shown that his subrogation rights against his corporation or partnerships were worthless within the meaning of sec. 166. - 12 - my good name, my goodwill.” There is no evidence to indicate, however, to what extent petitioner’s failure to make the tax payments would have resulted in any damage to his reputation or creditworthiness. Petitioners have introduced

6662(a) 1993 $135,811 $2,815.80 1994 3,628 725.60 1995 16,088 2,042.20 After concessions by the parties, the issues remaining for decision are: (1) Whether the monetary transfers that petitioners made to a corporation are capital contributions or are bona fide debts that are deductible as business bad debts under section 166 when they became worthless; (2) whether the net profits and losses of petitioners’ fireworks businesses are attributable to Mr.

OPINION The issues for decision are whether petitioner: (1) Correctly calculated his basis in computing a loss on the sale of the Atascadero property, or (2) in the alternative, is entitled to a deduction under section 166 for a worthless nonbusiness debt.

t published opinion 35 AFTR 2d 75-1439, 75-1 USTC par. 9449 (9th Cir. 1975). 3 The parties treat and brief the issue as to the allowability of petitioners’ claimed bad debt deductions relating to the automobile loans under the bad debt provisions of sec. 166. No claim is made that the claimed deductions should be allowed under the loss provisions of sec. 165. - 9 - The fact that some payments on debts become delinquent, standing alone, does not establish the worthlessness or uncollectibility of

Petitioner contends that he should be allowed to claim a nonbusiness bad debt deduction pursuant to section 166 for the loan to Mr.

d a worthless stock deduction of $7,374,438 (petitioner's adjusted basis in Günther's stock without regard to our discussion herein) under section 165 and a bad debt deduction of $6,564,124 (the intercom any account balance as of May 31, 1992) under section 166. For FYE May 31, 1993, petitioner claimed an additional worthless stock deduction of $2,435,876 and a bad debt deduction of $815,105. The worthless stock deduction equaled :he amount of the first waiver subject to réinstatement, less the

Section 166 provides, in general, for the deductibility of debt which becomes worthless during the taxable year. Under both provisions, the amount of the deduction is determined by reference to the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of the property. See secs. 165(b) and 166(b). The de

- 125 - Section 166 allows a taxpayer to deduct any business debt which becomes wholly or partially worthless during the taxable year.

2 - The issues for our consideration are: (1) Whether petitioners’ 1991, 1992, and 1993 income was underreported in the amounts of $28,195, $22,695, and $74,013, respectively; (2) whether petitioners are entitled to a 1992 bad-debt deduction under section 166;1 (3) whether petitioners are entitled to a 1992 casualty loss deduction under section 165; (4) whether petitioners’ 1992 gain from the sale of Glenwood Wrecker Service was understated in the amount of $10,635; and (5) whether petitioners

as decreasing, petitioner continued to advance ever-increasing amounts. Petitioner’s actions and the facts in this record do not portray the type of debtor-creditor relationship that petitioner must show to qualify for ordinary loss treatment under section 166, I.R.C. 1986. Considering the lack of intent evidenced by the manner in which repayment was made and interest accrued and the lack of objective evidence of debt, after reconsidering the evidence, we reach the same conclusion as we reached

Although the amount claimed on their 1991 return (cid:16)04w2as based on a loss from the sale or exchange of a capital asset, petitioners on brief contend that the $9,819 was a nonbusiness bad debt under section 166 instead of a loss from the sale or exchange of a capital asset.

pondent also contends that petitioners have not shown that, if the payment was a valid debt, it became worthless during 1991. Section 166(a) authorizes a deduction for a business bad debt that becomes worthless during the year.11 To be entitled to 11Sec. 166 distinguishes between business and nonbusiness bad debts. Nonbusiness bad debts of taxpayers other than corporations are short-term capital losses. See sec. 166(d)(1)(B). A nonbusiness debt is a debt other than “(A) a debt created or acquire

The sole issue for our consideration is whether bad-debt deductions taken in 1994 are allowable under - 2 - section 166.1 The remainder of respondent’s deficiency determinations resulted purely from computational adjustments caused by the disallowance of petitioner’s ordinary loss deduction.

Petitioners contend that they are entitled to a section 166 business bad debt deduction of $445,104 in 1991.

In support of his position that he is entitled to a business bad debt deduction under section 166(a), petitioner contends that the Miller loan constituted a business debt for purposes of section 166, that $2,6418 of that loan became worthless during 1993 within the meaning of that section, and that the amount of the deduction under section 166(a) for 1993 attributable to that worthless debt is $112,123, consisting of $2,641 of unrecovered principal of the Miller loan and $109,482 of attorney’s f

- 3 - (c) as capital losses under section 165(f), or (d) as business bad debts within the meaning of section 166;2 and (3) whether petitioners are liable for accuracy-related penalties authorized by section 6662?

The adjusted basis of a note equals the face amount of the debt minus any principal paid back by the debtor corporation. See sec. 1.166-1, 1.1011-1, Income Tax Regs. Where a taxpayer borrows money from a third party and contributes or reloans the proceeds to a corporation, the taxpayer includes the proceeds transferred to the corporation

ely described the basis for respondent’s determinations, so as to justify placing the burden of proof on respondent. 2. Whether advances that petitioner husband (hereinafter petitioner) made to a related corporation are deductible as bad debts under section 166. 3. Whether advances that petitioner made to a related corporation are deductible as ordinary losses under section 165.2 1 Respondent concedes that petitioners’ losses from the advances at issue are long-term capital losses that are deduc

for our consideration is whether advances from J&J to TLC Management, Inc. (TLC), were business loans or contributions to capital. If we decide that they were business loans, we must then decide whether J&J is entitled to a bad debt deduction under section 166. If we find that the advances were contributions to capital, we must then decide whether the advances should be treated as constructive dividends from J&J to the Shedds, in light of Mr. Shedd’s ownership of stock in both J&J and TLC. - 3

After concessions, the issues for decision are whether petitioners are: (1) Entitled, pursuant to section 166, to a business bad debt deduction relating to 1993; (2) entitled, pursuant to section 162, to a business expense deduction relating to 1994; and (3) liable, pursuant to section 6662(a), for accuracy-related penalties relating to the deductions.

for our consideration is whether advances from J&J to TLC Management, Inc. (TLC), were business loans or contributions to capital. If we decide that they were business loans, we must then decide whether J&J is entitled to a bad debt deduction under section 166. If we find that the advances were contributions to capital, we must then decide whether the advances should be treated as constructive dividends from J&J to the Shedds, in light of Mr. Shedd’s ownership of stock in both J&J and TLC. - 3

Section 166, however, distinguishes between business bad debts and nonbusiness bad debts. See sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business bad debts may be deducted against ordinary income if they become wholly or partially worthless during the year (in the case of the latter, to the extent charged off during the taxable year as partiall

A taxpayer is not entitled to a deduction for a worthless debt under section 166 in connection with an income item unless it has been included in the taxpayer’s gross income for Federal income tax purposes either for the year for which the deduction is claimed or for a prior year.

- 2 - The issues for decision are: (1) Whether petitioners’ advance of $200,000 to Richard Magness is deductible as a business bad debt under section 166 and (2) whether petitioners are liable for an accuracy-related penalty under section 6662(a).

- 3 - (c) as capital losses under section 165(f), or (d) as business bad debts within the meaning of section 166;2 and (3) whether petitioners are liable for accuracy-related penalties authorized by section 6662?

llowing concessions, the issues for decision are: 1. Whether petitioners’ advances to Cabana Boy were loans, as petitioners contend, or equity, as respondent contends. We hold that they were equity and therefore are not deductible as bad debts under section 166. 2. Whether petitioners may disregard Cabana Boy’s C corporation status and deduct the advances as if Cabana Boy had been organized as an S corporation and used the advances to pay ordinary and necessary expenses. We hold that they may no

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

- 3 - Section 166 entitles a taxpayer to a deduction for a bad debt that becomes worthless during the taxable year. A business bad debt can be deducted from ordinary income if it is either partially or totally worthless. Sec. 166(a). A nonbusiness bad debt, however, is treated as a short-term capital loss. Sec. 166(d). Petitioners bear the burden of prov

Following a concession by petitioner,1 the only issue for decision is whether petitioner is entitled to a section 166 "bad debt" deduction for funds it advanced to one of its construction superintendents, who is also the son of its president and controlling shareholder.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

After concessions, the issues for decision are: (1) Whether Lakeview Automotive, Inc., an S corporation wholly owned by petitioner, is entitled to a deduction for a bad debt loss under section 166 or, in the alternative, a theft loss under section 165; (2) whether Lakeview Automotive, Inc., is entitled to a deduction for a claimed rental expense; (3) whether Lakeview Automotive, Inc., is entitled to a deduction for legal fees incurred in defending a suit brought by a former shareholder; (4) whet

Whether petitioners may deduct: (a) Loan guaranty payments of $18,329 paid in 1991 and $98,000 paid in 1992 as business bad debts under section 166, and (b) legal fees (incurred in defending against enforcement of the loan guaranties) of $213,239 paid in 1991 and $45,636 paid in 1992 as ordinary and necessary business expenses under section 162;3 and 2.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

uld not repay the advances unless the device became a financial success. Bona Fide Debt A determination that the obligation to repay is not contingent on some future event does not necessarily mean that the loans are bona fide debts for purposes of section 166. It must also be established by petitioners that the loans were made with a reasonable expectation, belief, and intention that they would be repaid. The determination of whether a transfer was made with a real expectation of repayment and

ation by characterizing them as short-term capital losses. Only a bona fide debt, arising from a "debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money" qualifies for a deduction under section 166. Sec. 1.166-1(c), Income Tax Regs. Whether a bona fide debtor-creditor relationship exists is a question of fact to be determined upon a consideration of all the facts and circumstances. See Fisher v. Commissioner, 54 T.C. 905, 909 (1970)

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

Section 166 prescribes three ways in which deductions may be taken for worthless debts: (1) As an ordinary deduction during a taxable year in which a business bad debt becomes completely worthless; (2) as an ordinary deduction when a business bad debt becomes partially worthless during the taxable year, but only to the extent worthless; and (3) as

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

The issue for our consideration is whether petitioners are entitled to take an ordinary loss deduction for a business bad debt as allowed by section 166.1 Petitioners contend that, in 1 Unless otherwise stated, all section references are to the Internal Revenue Code in effect for the taxable year in issue, and all Rule references are to the Tax Court Rules of Practice (continued...) - 2 - the ordinary course of Mr.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

After concession by both parties,1 the issues for decision are: (1) Whether petitioners are entitled to claimed bad debt deductions under section 166 for 1994 and 1995; (2) whether petitioners failed to include interest income in their 1994 Federal income tax return; and (3) whether petitioners are liable for the accuracy-related penalties under section 6662.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

Petitioners contend, but have not established, that the loans should be deducted, pursuant to section 166, as bad debts.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

s to the reason he "sold" the notes (as well as the other securities at issue) is paraphrased in his brief, as follows: Throughout trial, Kanter candidly admitted that the purpose of the asset sales was to "establish" a loss for tax purposes, because of the traditional practice of Respondent's agents to routinely propose to disallow Section 165 or Section 166 deductions claimed in IRA's or Kanter's tax returns.

- 12 - Next, we consider whether the loans to Snacks were business or nonbusiness as they related to K&H.4 Section 166, which permits deductions for bad debts, distinguishes between business and nonbusiness bad debts.

uld not repay the advances unless the device became a financial success. Bona Fide Debt A determination that the obligation to repay is not contingent on some future event does not necessarily mean that the loans are bona fide debts for purposes of section 166. It must also be established by petitioners that the loans were made with a reasonable expectation, belief, and intention that they would be repaid. The determination of whether a transfer was made with a real expectation of repayment and

Section 166 allows a deduction for bad debts. Section 1.1502-11, Income Tax Regs., prescribes how consolidated taxable income is to be determined. Among other things, it prescribes that consolidated taxable income is to be determined by taking into account the separate taxable income of each member of the group and "[a]ny consolidated net operating

Bad Debt of $1,700 Under section 166, a deduction is allowed for a debt which becomes worthless during the taxable year.

Section 166, however, distinguishes between business bad debts and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business bad debts may be deducted against ordinary income if they become wholly or partially worthless during the year (in the case of the latter, to the extent charged off during the taxable year as partially wo

The issue for our consideration is whether bad debt deductions taken in 1990 and 1991 are allowable under - 2 - section 166.1 The remainder of respondent’s determination, the 1992 net operating loss (NOL) carryforward and a charitable gift deduction, is purely computational adjustments caused by the reduction of petitioner’s ordinary loss deduction and the corresponding increase in income.

Guarantor Payments Section 166 allows a deduction for the loss sustained on account of a bad debt.

Section 166, however, distinguishes between business bad debts and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business bad debts may be deducted against ordinary income if they become wholly or partially worthless during the year (in the case of the latter, to the extent charged off during the taxable year as partially wo

Section 166 allows a deduction for bad debts. Section 1.1502-11, Income Tax Regs., prescribes how consolidated taxable income is to be determined. Among other things, it prescribes that consolidated - 89 - taxable income is to be determined by taking into account the separate taxable income of each member of the group and “[a]ny consolidated net o

In 1993, Appolo wrote off the Four A debt as a business bad debt under section 166 without ever demanding payment from either Four A or the Four A shareholders.

A taxpayer is not entitled to a deduction for a worthless debt under section 166 in connection with an income item unless it has been included in the taxpayer's gross income for Federal income tax purposes either for the year for which the deduction is claimed or for a prior year.

Section 166 entitles a taxpayer to a deduction for a bad debt that becomes worthless during the taxable year. A business bad debt can be deducted from ordinary income if it is either partially or totally worthless. Sec. 166(a). A nonbusiness bad debt is deductible only as a short- term capital loss and only if the debt becomes totally worthless dur

Section 166--Bad Debts Petitioner next argues, in the alternative, that the expenses originally deducted as a section 1244 worthless stock loss are deductible as a business bad debt under section 166. In addition, petitioner argues that the $30,550 paid for the release of the two computer leases, which was originally deducted as a long-term capital

Section 166 entitles a taxpayer to a deduction for a bad debt that becomes worthless during the taxable year. A business bad debt can be deducted from ordinary income if it is either partially or totally worthless. Sec. 166(a). A nonbusiness bad debt is deductible only as a short- term capital loss and only if the debt becomes totally worthless dur

Section 166 entitles a taxpayer to a deduction for a bad debt that becomes worthless during the taxable year. A business bad debt can be deducted from ordinary income if it is either partially or totally worthless. Sec. 166(a). Only a bona fide debt is deductible. Sec. 1.166-1(c), Income Tax Regs. Petitioners bear the burden of proving that a bona

Worthless debts arising from unpaid fees shall not be allowed as a deduction under section 166 unless the income such item represents has been included in the return of income for the year for which the deduction as a bad debt is claimed or for a prior taxable year.

In 1993, Appolo wrote off the Four A debt as a business bad debt under section 166 without ever demanding payment from either Four A or the Four A shareholders.

Section 166 allows a deduction for bad debts. Section 1.1502-11, Income Tax Regs., prescribes how consolidated taxable income is to be determined. Among other things, it prescribes that consolidated - 89 - taxable income is to be determined by taking into account the separate taxable income of each member of the group and “[a]ny consolidated net o

The relevant provision of section 6511(d) provides that, in the case of a refund that relates to an overpayment of tax imposed on account of a worthless debt under section 166 or a worthless security under section 165(g), or the effect that the deductibility of such a debt or security has on the application to the taxpayer of a carryover, "in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be 7 years from the date prescribed by law for filing the return for

Year Deficiency 6662(a) 1991 $25,105 $5,021 1992 9,917 1,983 We must decide whether section 166 allows petitioner to deduct the $50,000, $47,350, $31,000, $12,000, and $5,000 amounts discussed below as worthless business debts.

s for decision are: (1) Whether petitioner incurred a loss on a deposit in a "qualified financial institution" within the meaning of section 165(l)(3) and, if petitioner's loss does not come within the purview of section 165(l), then (2) whether petitioner incurred a deductible nonbusiness bad debt pursuant to section 166.

The issue for decision is whether petitioners are entitled either to a section 166 business bad debt deduction with respect to $128,841 that was transferred to petitioners’ closely held corporation or to a section 1244 ordinary loss deduction in the same amount with respect to the stock of petitioners’ closely held corporation.

As a general rule, section 166 allows a deduction for any bad debt that becomes worthless during the taxable year.

In general, section 166 allows a taxpayer a deduction for any debt that becomes worthless within the taxable year.

For purposes of section 166, a contribution to capital is not considered a debt.

Section 1038(a) forestalls a seller, incident to a section 1038 reacquisition of real property, from claiming a bad debt deduction under section 166 for the default in payment of the purchase money mortgage debt secured by that property.

Under section 166, worthless business bad debts are fully deductible from ordinary income. The parties do not dispute the existence of a bona fide debt between VIP and Security; the parties do dispute whether petitioner “paid” VIP's debt as guarantor, and, if so, whether petitioner incurred a debt that became worthless during the 1986 taxable year.3 Peti

After concessions by the parties,1 the issues for decision are: (1) Whether pursuant to section 174, 3-Koam may deduct research and development expenses allegedly incurred in 1990.2 We hold it may not, except to the extent allowed by respondent.3 (2) Whether pursuant to section 166, 3-Koam may claim a $30,000 bad debt deduction in 1990.

Section 166, however, distinguishes between business bad debts and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business bad debts may be deducted against ordinary income if they become wholly or partially worthless during the year (in the case of the latter, to the extent charged off during the taxable year as partially wo

urred in those years "which exceeded the current capital gains and other application of capital losses during the period from 1979 to 1988, the capital loss carryover created would be capable of being carried into 1989 and offset the reported gain." Petitioners are unclear about whether they are seeking a bad debt deduction under the provisions of section 166, a loss deduction under the provisions of section 165, or both with respect to the Riviera and the Arizona Marine transactions.

As a general rule, section 166 allows a deduction for any debt that becomes worthless during the taxable year.

For purposes of section 166, contributions to capital do not constitute bona fide debts.

d combined wages of $84,000 from Cirtex in 1989. They contend that $45,000 of the $84,000 reported as wages represent the repayment of loans they made in 1986 and 1989. In the alternative, they claim entitlement to a $45,000 bad debt deduction under section 166. Respondent contends that the $45,000 in payments that petitioners made to Cirtex constitute capital contributions, not loans, and that the entire $84,000 constitutes wages as reported on petitioners' 1989 return. Petitioners claim they a

Section 166 distinguishes between business and nonbusiness bad debts. A business bad debt is a debt created or acquired in connection with the taxpayer's trade or business or a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. Sec. 166(d)(2). Nonbusiness bad debts of taxpayers other than corporations are

was too high during both years at issue. Petitioner therefore attempted to reduce its taxable income by extending the rebates. - 25 - In sum, we hold that petitioner has failed to establish that the receivables at issue were bad debts pursuant to section 166. E. Petitioner Was Required To Accrue Sales Income When All Events Had Occurred That Fixed the Right To Earn the Income and the Amount Was Determinable With Reasonable Accuracy Petitioner further contends that it should not have to book eac

The only issue for decision involves petitioners’ entitlement under section 166 to a claimed $184,874 business bad debt deduction.

As a general rule, section 166 allows a deduction for any bad debt that becomes worthless during the taxable year.

He had, however, for purposes of section 166, only one trade or business--that of being an employee or officer.

han (1) a debt created or acquired in connection with a trade or business of the taxpayer or (2) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. Only a bona fide debt qualifies as debt for purposes of section 166. A bona fide debt is a debt that arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. Sec. 1.166-1(c), Income Tax Regs. Whether a bona fide debtor-creditor -

Section 166, however, distinguishes between business bad debts and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business bad debts may be deducted against ordinary income if they become wholly or partially worthless during the year (in the case of the latter, to the extent charged off during the taxable year as partially wo

the items were worthless or that petitioners incurred any loss for that year. Petitioners assert that the reported items are losses from nonbusiness bad debts that became worthless during the taxable year and are deductions that are allowable under section 166. Section 166(a) provides there shall be allowed as a deduction any debt that becomes worthless during the taxable -53- year. The amount of the deduction for a bad debt is limited to the taxpayer's adjusted basis in the debt as provided by

a deposit in a “qualified financial institution” within the meaning of section 165(1)(3) and, if petitioner’s loss does not come within the purview of section 165(1), then (2) whether petitioner incurred a deductible nonbusiness bad debt pursuant to section 166. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years under consideration. All Rule references are to the Tax Court Rules of Practice and Procedure. Some of the facts have been stipul

(2) Whether petitioner can take a bad debt deduction pursuant to section 166 for the 1989 tax year.

166-665 be made to the consumer. The legislature likely anticipated that the payments pursuant to N.C. Gen. Stat. sec. 166-665 would provide the consumer a modicum of relief in circumstances where the amounts involved would not justify the cost of a civil action for damages. Respondent attempted to discredit Stevens using the fertilizer inspec

he shares on the installment method causes them to recognize income for taxable year 1989 when the sale actually produced a loss. As we discuss below, to the extent they suffer an allowable loss, petitioners may avail themselves of the provisions of sec. 166 in the year that the note becomes worthless. American Offshore, Inc. v. Commissioner, 97 T.C. 579, 592-597 (1991). - 16 - Commissioner, 478 F.2d 1160, 1166 (8th Cir. 1973), affg. on this issue and remanding on another issue 56 T.C. 388 (1971

However, section 166 distinguishes between business bad debts and nonbusiness bad debts.

Similarly, no bad debt deduction under section 166 for a wholly or partially worthless account receivable shall be allowed for any amount not previously taken into income under the nonaccrual- experience method.

titioner's father constitutes nondeductible personal interest as that term is used in section 163(h)(1).4 We have also considered, and reject, petitioners' alternative argument that the interest deductions should be allowed under the provisions of section 166. That section generally allows a deduction for any bad debt that becomes worthless during the taxable year. In order to be entitled to a section 166 deduction, petitioners must establish that petitioner was owed a bona fide debt by Stone Je

ssioner, T.C. Memo. 1979- 361. Only bona fide indebtedness can give rise to a deduction 2 The authority of the Secretary to allow a deduction for debts that are only recoverable in part is not at issue in this case. See sec. 166(a)(2). - 16 - under section 166. Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980); sec. 1.166-1(c), Income Tax Regs. Petitioners bear the burden of proof on all issues. Rule 142(a). In her notice of deficiency, respondent disallowed petitioners' deduction of

e and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for purposes of the deduction under section 166. Petitioners did not produce any evidence at trial that would indicate that, if the Raiders had instituted collection proceedings, the result would not have been the satisfaction of execution on the judgment. The Raiders continued to do bu

Section 166 distinguishes between business bad debts and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business bad debts may be deducted against ordinary income and are deductible whether such debts become wholly or partially worthless during the year. Nonbusiness bad debts may be deducted only as short-term capital losses

D STATES TAX COURT INTERGRAPH CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 21286-93. Filed May 8, 1996. Held: Among other things, petitioner, in the year of payment, is not entitled to a claimed sec. 166, I.R.C., bad debt deduction with respect to its payment as guarantor of a Japanese-yen-denominated loan made to a Japanese subsidiary corporation. Where a guarantor has a right of subrogation against, or a right of reimbursement from, the pr

timing and character of the loss. We first consider petitioner’s contention that, in contrast to the manner in which he reported it, the loss should have been reported as an ordinary loss under section 1652 or a business- related bad debt loss under section 166. Losses under section 165(c) are limited to those incurred in a trade or business, in a transaction entered into for profit, or from some form of casualty. A business loss under section 166 would also require the showing that the debt was

OPINION The only issue for decision is whether petitioners may deduct $182,451.03 in 1988 as a bad debt under section 166.3 Section 166(a) allows taxpayers a deduction for any bona fide debt which becomes worthless in the taxable year.

Whether funds advanced by petitioner to a related corporation are deductible under section 166 as a bad debt.

ing for decision are: (1) Whether an advance by petitioner Billie Lykins to Tag Coal Corp. was a loan or a capital contribution; and, if the advance was a loan, (2) whether such advance was a "business" or a "nonbusiness" debt within the meaning of section 166. Some of the facts have been stipulated, and they are so found. Petitioners resided in Versailles, Kentucky, at the time that their petition was filed with the Court. FINDINGS OF FACT Petitioner Billie Lykins (petitioner) grew up in easter

hless during 1991, and (3) they are therefore entitled to a $50,000 nonbusiness bad debt deduction for 1991. Respondent does not dispute that the $50,000 punitive damages award constituted a debt owed to petitioner by Mr. Erkel within the meaning of section 166. However, respondent contends that petitioners are not entitled under section 166 to a deduction for 1991 with respect to that debt because (1) they failed to establish that the punitive damages award became a worthless debt during 1991 w

deduction on Schedule C of his 1984 income tax return in the amount of $76,056 for “bad notes” with respect to his dealings with Carter. Respondent disallowed the claimed deduction on the basis that it was not a bona fide debt within the meaning of section 166. OPINION Issue 1. Encore Section 162 allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. In order to establish entitlement to deductions and credits, taxpayer

Similarly, no bad debt deduction under section 166 for a wholly or partially worthless account receivable shall be allowed for any amount not previously taken into income under the nonaccrual- experience method.

Section 166 distinguishes between business bad debts and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business bad debts may be deducted against ordinary income and are deductible whether such debts become wholly or partially worthless during the year. Nonbusiness bad debts may be deducted only as short-term capital losses

As part of the purchase, Riverbank, not the partnerships, is entitled to account for their acquisition. Furthermore, if the conditions warranted, Riverbank (not the partnerships) might be entitled to any potential bad debt deductions. See generally sec. 166. To hold that the partnerships should reduce their cancellation of indebtedness income by the $650,000 another entity paid would ignore the realities underlying the separate mortgage purchase agreement and the practical effects of Riverbank’s

e and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for purposes of the deduction under section 166. Petitioners did not produce any evidence at trial that would indicate that, if the Raiders had instituted collection proceedings, the result would not have been the satisfaction of execution on the judgment. The Raiders continued to do bu

becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year." Only a bona fide debt qualifies for purposes of section 166. A bona fide debt "arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money." Sec. 1.166-1(c), Income Tax Regs. Whether the parties actually intended the transact

Similarly, no bad debt deduction under section 166 for a wholly or partially worthless account receivable shall be allowed for any amount not previously taken into income under the nonaccrual- experience method.

Co. v. Commissioner, 800 F.2d 625, 629 (6th Cir. 1986), affg. T.C. Memo. 1985-58; Calumet Indus., Inc. & Subs. v. Commissioner, 95 T.C. 257, 284 (1990). A taxpayer must establish the validity of a debt before any portion of it may be deducted under section 166. American - 14 - Offshore, Inc. v. Commissioner, 97 T.C. 579, 602 (1991). Whether a transfer creates a debt is a question of fact, for which the taxpayer bears the burden of proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933)

e and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for purposes of the deduction under section 166. Petitioners did not produce any evidence at trial that would indicate that, if the Raiders had instituted collection proceedings, the result would not have been the satisfaction of execution on the judgment. The Raiders continued to do bu

tively, petitioner argues that if Intergraph is not entitled to the claimed foreign currency loss and interest expense deductions, Nihon Intergraph’s obligation to reimburse Intergraph for Intergraph’s payment of the overdraft amount should be treated as worthless, and Intergraph should be entitled for 1987 to a $6,484,169 bad debt deduction under section 166 with regard thereto.

Similarly, no bad debt deduction under section 166 for a wholly or partially worthless account receivable shall be allowed for any amount not previously taken into income under the nonaccrual-experience method.

g as a business bad debt any portion of the bad debt deduction that she claimed. A nonbusiness bad debt is considered a loss from the sale or exchange of a short-term capital asset. Sec. 166(d)(1)(B). "Only a bona fide debt qualifies for purposes of section 166. A bona fide debt is a debt which arises from a debtor- creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money." Sec. 1.166-1(c), Income Tax Regs. Petitioner bears the burden of - 4

- 2 - decision are: (1) Whether a deduction claimed by petitioners as a business bad debt became worthless in 1990, and (2) whether the debt involved qualifies as a "business" bad debt under section 166.2 The case was submitted on the basis of a stipulation and two supplemental stipulations of fact.

Respondent makes a number of arguments in support of her disallowance. Petitioners' primary argument is that petitioner, as guarantor, made the payment in the course of his trade or business, and is, therefore, entitled to a business bad debt under section 166. To this end, petitioners devote a substantial part of their brief to making a distinction between business and nonbusiness bad debts. Section 166 allows a deduction for the loss suffered on account of a bad debt. A deduction is allowed to

With respect to petitioners' claims for bad debts, section 166 permits a deduction for a debt that becomes worthless during the taxable year.

In order for petitioner to claim a bad debt loss under section 166, a bona fide debt must exist.

Worthless debts arising from * * * items of taxable income shall not be allowed as a deduction under section 166 unless the income such items represent has been included in the return of income for the year for which the deduction as a bad debt is claimed or for a prior taxable year.