Thomas M. and Christine A. Fries - Page 7

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          issue petitioner 4,550 shares of Action and 56 shares of Caldwell           
          Group, Ltd. (a partially owned subsidiary of National acquired              
          after petitioner's departure) in a general distribution of                  
          National's assets in partial satisfaction of its creditors.                 
                                       OPINION                                        
               We must adjudge whether petitioners are entitled to a bad              
          debt deduction under section 166 in 1989 for the $74,700 advance            
          petitioner made to National in 1987.  (The additional $300                  
          petitioners claimed on their return represents the sum petitioner           
          paid for his stock in National.  This amount is, therefore,                 
          ineligible for a section 166 deduction.  Sec. 1.166-1(c), Income            
          Tax Regs.)  We must also decide whether petitioners are liable              
          for an accuracy-related penalty under section 6662(a) for a                 
          substantial understatement of income tax during 1989.                       
          Issue 1.  Whether Petitioners Are Entitled to a Section 166 Bad             
          Debt Deduction                                                              
               Section 166(a)(1) provides that a deduction shall be allowed           
          for "any debt which becomes worthless within the taxable year."             
          However, section 166 distinguishes business bad debts from their            
          nonbusiness counterparts.  Sec. 166(d); sec. 1.166-5(b), Income             
          Tax Regs.  Business bad debts may be deducted against ordinary              
          income whether wholly or partially worthless during the year (to            
          the extent charged off during the tax year as partially worthless           
          debts).  Sec. 1.166-3, Income Tax Regs.  Nonbusiness bad debts              
          may be deducted, but only if they are entirely worthless in the             





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