Kaps Warehouse, Inc. - Page 20

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            taxable year is allowable as a deduction.  A debt will generally be                       
            considered worthless only when it can be reasonably expected that                         
            the debt is without possibility of future payment and legal action                        
            to enforce the debt would not result in satisfaction.  Hawkins v.                         
            Commissioner, 20 T.C. 1069 (1953).  The taxpayer bears the burden                         
            of proving that the debt had value at the beginning of the taxable                        
            year and that it became worthless during and prior to the end of                          
            that year.  Millsap v. Commissioner, 46 T.C. 751, 762 (1966), affd.                       
            387 F.2d 420 (8th Cir. 1968). In other words, the taxpayer must                           
            demonstrate what part of the debt is worthless. Sec. 1.166-                               
            3(a)(2)(iii), Income Tax Regs.  In the case of a partial writeoff                         
            of a bad debt, the question is whether the Commissioner's                                 
            discretion was abused.  Brimberry v. Commissioner, 588 F.2d 975,                          
            977 (5th Cir. 1979), affg. T.C. Memo. 1976-209.                                           
                  Here, petitioner is claiming a partial worthlessness of the                         
            debts at issue; that is, the accounts payable to petitioner were                          
            worthless to the extent of the rebates.  As discussed hereafter,                          
            petitioner failed to prove that any portion of the accounts payable                       
            to petitioner from its related entities was worthless and thus                            
                        1.  KAW                                                                       
                  There is no evidence that KAW's accounts payable to petitioner                      
            were partially worthless.  Petitioner gave a $40,000 rebate to KAW                        
            in fiscal year 1992. In that year, KAW:  (1) Had retained earnings                        

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Last modified: May 25, 2011