Billie and Florence Lykins - Page 11

               2.   Business versus nonbusiness bad debt                              
               We must next decide whether petitioner's loan to Tag Coal              
          was a business or a nonbusiness debt within the meaning of                  
          section 166.                                                                
               As previously mentioned, section 166 allows a deduction for            
          any bad debt that becomes worthless during the taxable year.3               
          Business bad debts are fully deductible from ordinary income;               
          however, nonbusiness bad debts of taxpayers other than                      
          corporations are treated as short-term capital losses.  Sec.                
          166(d)(1).  A nonbusiness bad debt is defined as a debt other               
          than "(A) a debt created or acquired * * * 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."  Sec. 166(d)(2).                                                 
               The question of whether a debt is a business or nonbusiness            
          debt is essentially a question of fact, the resolution of which             
          depends upon whether the debt is "proximately" related to the               
          trade or business of the taxpayer.  Sec. 1.166-5(b), Income Tax             
          Regs.  A proximate business relationship exists only if the                 
          taxpayer's dominant motivation in making the loan was for                   
          business reasons.  United States v. Generes, 405 U.S. 93 (1972).            
          Thus, in order to receive the favorable tax treatment afforded to           
          business bad debts, petitioner must prove that he was engaged in            

          3 Respondent does not dispute that the advance, if it was a                 
          debt, as we have so held, became worthless in 1989.                         

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