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decision is whether petitioners are entitled to a nonbusiness
bad debt deduction pursuant to section 166.
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Mr. Bauer resided in
Riverside, California, and Mrs. Bauer resided in Laughlin,
Nevada, at the time they filed their petition.
Mrs. Bauer is a real estate broker. Mr. Bauer is a
machinist. During the year at issue, Mr. Bauer spent his
weekends with Mrs. Bauer in Laughlin, Nevada, and in Bullhead
City, Arizona, a town located directly across the Colorado River
from Laughlin.
Petitioners, but especially Mrs. Bauer, frequently dined at
a restaurant in Bullhead City named The Diamond Lil’s Drunken
Lobster (the Drunken Lobster). The Drunken Lobster was an
upscale restaurant specializing in steak and lobster that opened
in 1990. The Drunken Lobster was owned and operated by father
and son, Salvatore and John Dubato (John) (collectively referred
to as the Dubatos), who also were petitioners’ personal friends.
During 1991, the Drunken Lobster was having financial
problems. The Dubatos approached petitioners for a loan, and
petitioners decided to advance them funds for use in their
business. Petitioners made a series of four interest-free loans
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