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Nonbusiness bad debts, on the other hand, may be deducted,
but only if they become entirely worthless during the year
claimed; they are, moreover, to be treated as short-term capital
losses. Sec. 166(d). Generally, a nonbusiness bad debt is a
debt other than a debt (1) created or acquired in the trade or
business of the taxpayer or (2) the loss from the worthlessness
of which is incurred in a trade or business of the taxpayer.
Sec. 166(d)(2). The question of whether a debt is a nonbusiness
bad debt is a question of fact. Sec. 1.166-5(b), Income Tax
Regs.
A deduction for a bad debt is limited to a bona fide debt.
Sec. 1.166-1(c), Income Tax Regs. A bona fide debt is a debt
that "arises from a debtor-creditor relationship based upon a
valid and enforceable obligation to pay a fixed or determinable
sum of money." Id. For purposes of section 166, a contribution
to capital is not considered a debt. In re Uneco, Inc., 532 F.2d
1204, 1207 (8th Cir. 1976); Kean v. Commissioner, 91 T.C. 575,
594 (1988); sec. 1.166-1(c), Income Tax Regs.
Deductions are a matter of legislative grace, and
petitioners bear the burden of proving that they are entitled to
the deductions claimed. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435 (1934). Taxpayers are required to
maintain records that are sufficient to enable the Commissioner
to determine their correct tax liability. See sec. 6001;
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Last modified: May 25, 2011