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As to both bad debt deductions, petitioners contend that
they are entitled to deduct the loans as ordinary losses.
Alternatively, petitioners argue that the mining companies, CME
and CMA, are partnerships and that, therefore, petitioners are
entitled to deduct their distributive share of the mining
partnerships' losses against ordinary income for each taxable
year.2
Section 166(a)(1) provides, in general, for the deduction of
debts that become wholly worthless during a taxable year.
Section 166, however, distinguishes between business bad debts
and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income
Tax Regs. Business bad debts may be deducted against ordinary
income if they become wholly or partially worthless during the
year (in the case of the latter, to the extent charged off during
the taxable year as partially worthless debts). Sec. 1.166-3,
Income Tax Regs. To qualify for the business bad debt deduction,
the taxpayer must establish that the debt was proximately related
to the conduct of the taxpayer's trade or business. United
States v. Generes, 405 U.S. 93, 103 (1972); sec. 1.166-5(b),
Income Tax Regs.
2 Petitioners concede that they did not claim their
distributive share of the partnership losses on their personal
returns for the years in which they were incurred and that the
statute of limitations bars claiming this loss now. Petitioners,
however, seek to adjust their basis in their investment and the
notes to reflect the losses that they should have claimed.
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Last modified: May 25, 2011