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the year claimed by petitioner; and (2) petitioner, as guarantor,
did not pay the Security note in the year claimed by petitioner,
and therefore petitioner is not entitled to a bad debt deduction
in 1986. Because we find that the issue of worthlessness is
determinative of petitioner's right to a bad debt deduction in
the instant case, we shall address that issue first.
Section 166(a) provides that a taxpayer may deduct any debt
that becomes wholly or partially worthless within the taxable
year. Under section 166, worthless business bad debts are fully
deductible from ordinary income. The parties do not dispute the
existence of a bona fide debt between VIP and Security; the
parties do dispute whether petitioner “paid” VIP's debt as
guarantor, and, if so, whether petitioner incurred a debt that
became worthless during the 1986 taxable year.3
Petitioner bears the burden of proving that the debt became
worthless in the year in which it was claimed, that such
worthlessness resulted in a NOL, and that the NOL is eligible to
be carried back to the 1984 taxable year. Rule 142(a). There is
2(...continued)
record, under Oklahoma State law petitioner would have an
equitable right of subrogation if he paid the VIP note in his
capacity as guarantor. Moore v. White, 603 P.2d 1119 (Okla.
1979).
3 Additionally, if we find that petitioner did pay VIP's
debt as guarantor and that the debt became worthless in 1986,
respondent argues that such loss is a nonbusiness bad debt, and
therefore the loss is a short-term capital loss which does not
give rise to a NOL carryback. See sec. 166(d)(1)(B).
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