on their investment. Carter investors had the option of taking
their quarterly payments or electing to have the funds rolled
over into another promissory note. Petitioner involved several
of his investment clients, including friends and relatives, in
Carter. Petitioner and his clients regularly elected to reinvest
their quarterly interest payments. Carter made no payments on
any of the notes at issue.
An investigation, conducted by the Securities and Exchange
Commission in 1983, revealed that Carter did not represent any
doctors, had no medical accounts receivable, and was not engaged
in the medical factoring business. Carter filed a petition in
bankruptcy in the U.S. Bankruptcy Court for the Central District
of California under chapter 11 of the Bankruptcy Code on December
8, 1983. In 1990, the proceeding was converted to a chapter 7
bankruptcy proceeding. In 1992, petitioner received a payment
representing some percentage of his total investment in Carter as
a result of the bankruptcy proceeding.
Petitioner claimed a 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.
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