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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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