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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 whether a debt is a nonbusiness bad
debt is a question of fact. Sec. 1.166-5(b), Income Tax Regs.
Petitioner has the burden of showing that he was engaged in a
trade or business to which the debts in question are proximately
related. Spillers v. Commissioner, 407 F.2d 530, 534 (5th Cir.
1969), affg. T.C. Memo. 1967-216; United States v. Byck, 325 F.2d
551, 552 (5th Cir. 1963); Deely v. Commissioner, 73 T.C. 1081,
1092 (1980).
The question of whether a shareholder’s loans to his
corporation are business or nonbusiness bad debts frequently has
been litigated. A worthless debt resulting from a loan by a
2(...continued)
nonbusiness debt; and
(B) where any nonbusiness debt becomes worthless
within the taxable year, the loss resulting therefrom
shall be considered a loss from the sale or exchange,
during the taxable year, of a capital asset held for
not more than 1 year.
(2) Nonbusiness debt defined.--For purposes of
paragraph (1), the term “nonbusiness debt” means a debt other
than--
(A) a debt created or acquired (as the case may
be) in connection with a trade or business of the
taxpayer; or
(B) a debt the loss from the worthlessness of
which is incurred in the taxpayer’s trade or business.
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Last modified: May 25, 2011