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the March 15, 1988, meeting. These include a $77,000 advance in
1988, an $84,400 advance in 1989, and a $19,350 advance in 1990.
SLI has made no payments on any of these advances.
SLI was a going concern in 1988 and has continued as such
through the time of trial.
Petitioners claimed the 1981 through 1985 advances as
"short-term capital losses" on Schedule D of their 1988 Federal
income tax return. SLI did not file a U.S. Corporate Tax Return
(Form 1120) for the taxable year 1988 and, therefore, did not
report any cancellation of indebtedness income as a result of
these alleged canceled debt obligations.
OPINION
The only issue for decision is whether petitioners may
deduct $182,451.03 in 1988 as a bad debt under section 166.3
Section 166(a) allows taxpayers a deduction for any bona fide
debt which becomes worthless in the taxable year. A bona fide
debt is a debt that arises from a debtor-creditor relationship
based upon a valid and enforceable obligation to pay a fixed or
3Petitioners claimed a short-term capital loss deduction on
Schedule D of their 1988 Federal income tax return, alleging that
the loans constituted nonbusiness bad debts. Sec. 166(d)
distinguishes between business and nonbusiness bad debts. If the
loss arises from a business debt, it may be deducted in full
against ordinary income; if the loss arises from a nonbusiness
debt, it is treated as a short-term capital loss. Sec. 166(a),
(d). On brief, petitioners now argue that the loans were, in
fact, business bad debts.
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