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The second issue for decision is whether petitioners are
entitled to claim a bad debt deduction for 1991. In the notice
of deficiency, respondent disallowed the claimed bad debt
deduction upon the grounds that petitioners did not establish
that a debtor-creditor relationship was intended by the alleged
loan, and, even if such relationship existed, petitioners did not
establish that the debt was worthless or that any attempt was
made to collect the loan.
As a general rule, section 166 allows a deduction for any
bad debt that becomes worthless during the taxable year. Section
166(d), however, distinguishes business bad debts from
nonbusiness bad debts. Nonbusiness bad debts may be deducted in
the same manner as short-term capital losses, subject to the
limitations on capital losses as provided in section 1211. Sec.
166(d); sec. 1.166-5(a), Income Tax Regs.
Nonbusiness bad debt means a debt other than a debt created
or acquired in connection with a trade or business of the
taxpayer or a debt the loss from the worthlessness of which is
incurred in the taxpayer's trade or business. Sec. 166(d)(2).
The use of the borrowed funds by the borrower is of no
consequence in making the determination of worthlessness. Sec.
1.166-5(b), Income Tax Regs. In this case, the alleged debt
would have been nonbusiness debt created outside petitioner
wife's trade as a librarian. The funds were allegedly advanced
so petitioner husband would be able to further market the golf
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