Stephen F. Scofield and Nancy E. Scofield - Page 14

          from liability for the Northeast litigation and adversary                   
                                    II.  OPINION                                      
          A.   Whether Petitioners May Deduct $750,000 That Petitioner Paid           
               To Settle Civil Litigation and Petitioner's Bankruptcy                 
               1.   Whether Petitioner's Settlement Payment Was a Business            
                    Bad Debt                                                          
               Petitioners contend that they may deduct as a business bad             
          debt or as a business expense $750,000 they paid in 1988 to                 
          settle the Northeast litigation and petitioner's bankruptcy                 
               A taxpayer may deduct debts that become worthless in the               
          taxable year.  Sec. 166(a)(1).  Section 166 distinguishes between           
          business and nonbusiness bad debts.  A business bad debt is a               
          debt created or acquired in connection with the taxpayer's trade            
          or business or a debt the loss from the worthlessness of which is           
          incurred in the taxpayer's trade or business.  Sec. 166(d)(2).              
          Nonbusiness bad debts of taxpayers other than corporations are              
          short-term capital losses.  Sec. 166(d)(1)(B).                              
               A taxpayer may deduct as a business bad debt a payment it              
          makes to discharge the taxpayer's obligation as a guarantor if:             
          (a) The taxpayer was engaged in a trade or business when he or              
          she made the guaranty, and (b) the guaranty was proximately                 
          related to the conduct of that trade or business.  Jones v.                 
          Commissioner, T.C. Memo. 1997-368; Weber v. Commissioner, T.C.              
          Memo. 1994-341; Smartt v. Commissioner, T.C. Memo. 1993-65; see             

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