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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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