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executed two personal guaranty agreements that covered the debt
Four A owed to Appolo. In 1993, Four A declared bankruptcy, and
Appolo wrote off the Four A debt and claimed a bad debt deduction
under section 166. As a result, on their respective 1993 Federal
income tax returns, G. Asher and L. Asher each reported ordinary
losses of $80,246 as their distributive share of Appolo's bad
debt deduction.
In the answer, respondent, for the first time, disallowed
these ordinary losses and asserted increased deficiencies in the
income taxes of G. Asher and L. Asher. When a new matter is
pleaded in the answer, the burden of proof for that issue is on
respondent. Rule 142(a).
If Appolo is entitled to a bad debt deduction, then G. Asher
and L. Asher are entitled to ordinary losses related to their
distributive shares of the deduction. Respondent argues that
Appolo is not entitled to a bad debt deduction under section 166
for the Four A debt because the Four A shareholders signed
personal guaranties and had the financial ability to repay the
Four A debt; therefore, the debt was not worthless as required
under section 166. G. Asher and L. Asher argue that the
guaranties were not supported by adequate and sufficient
consideration and are not enforceable; therefore, the debt is
worthless, and Appolo is entitled to a bad debt deduction.
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Last modified: May 25, 2011