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Income Tax Regs. A debt becomes worthless in the year in which
identifiable events clearly mark the futility of any hope of
further recovery. James A. Messer Co. v. Commissioner, 57 T.C.
848, 861 (1972). Taxpayers bear the burden of proving the
worthlessness of debt in the year it is claimed. Perry v.
Commissioner, 22 T.C. 968, 973 (1954).
The value of the collateral, if any, securing the debt must
be considered in determining whether a debt is worthless. Sec.
1.166-2(a), Income Tax Regs. Moreover, the debt cannot be
worthless until the security itself becomes worthless. LeRoy v.
Commissioner, 4 T.C. 70 (1944), affd. 152 F.2d 936 (2d Cir.
1945); Hubble v. Commissioner, T.C. Memo. 1981-625. Taxpayers
have the burden of proving the collateral is worthless. Rule
142(a); Turbeville v. Commissioner, 31 B.T.A. 283 (1934), affd.
on other grounds 84 F.2d 307 (5th Cir. 1936).
Petitioner and Klutts were liable to Weimar Bank for the
$30,000, and the Texaroda oil wells were considered collateral on
that loan. Therefore, the substance of the transaction wherein
Weimar Bank transferred $30,000 to National Bank of Commerce and
received back property in the form of Texaroda oil wells was a
loan by petitioner and Klutts to Wood with the oil wells serving
as collateral on that loan. Thereafter, petitioner and Klutts
transferred the oil wells to Weimar Bank to serve as collateral
on their loan.
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