- 5 -
OPINION
The issue to be decided in the instant case is whether,
pursuant to section 166(a)(1), petitioners are entitled to three
bad debt deductions claimed by them.
Section 166(a)(1) generally provides that debts that become
wholly worthless during a taxable year may be deducted in that
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 worthless debts). Sec.
1.166-3, Income Tax Regs. To qualify for a business bad debt
deduction, the taxpayer must establish that the debt was
proximately related to the conduct of the taxpayer's trade or
business. United States v. Generes, 405 U.S. 93, 103 (1972);
sec. 1.166-5(b), Income Tax Regs.
Nonbusiness bad debts, on the other hand, may be deducted,
but only if they become entirely worthless during the year they
are claimed; they are, moreover, to be treated as short-term
capital losses. Sec. 166(d)(1)(B). Generally, a nonbusiness bad
debt is a debt other than a debt (1) created or acquired in the
trade or business of the taxpayer or (2) the loss from the
worthlessness of which is incurred in a trade or business of the
taxpayer. Sec. 166(d)(2). The question of whether a debt is a
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011