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mortgage. We, therefore, find that any discharge of indebtedness
because of the mortgage on the property transferred occurred in
1985.
The next issue for decision is whether petitioners are
entitled to a business bad debt deduction in 1987 in the amount
of $70,000 because of the worthlessness of the debt evidenced by
the promissory note executed by Mr. Kluzak in favor of petitioner
on October 6, 1986.
Section 166(a)(1) provides that a taxpayer shall be allowed
as a deduction any debt that becomes worthless within the taxable
year. A loss under section 166(a)(1) is an ordinary loss
deduction. Section 166(d) provides that a nonbusiness bad debt,
which is defined as a debt other than one created or acquired in
connection with a trade or business of the taxpayer, shall be
treated as a short-term capital loss. Sec. 166(d)(1)(B).
Respondent first contends that the debt was not a bona fide
debt. In order for petitioner to claim a bad debt loss under
section 166, a bona fide debt must exist. A bona fide debt is a
debt that arises from a debtor-creditor relationship based on a
valid and enforceable obligation to pay a fixed or determinable
sum of money. Sec. 1.166-1(c), Income Tax Regs. No deduction
may be taken for an advance made without a reasonable
expectation, belief, and intention that it will be repaid. See
Zimmerman v. United States, 318 F.2d 611, 613 (9th Cir. 1963).
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