John H. and Mary E. Douglas - Page 9

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               Petitioners do not contend, nor does the record support a              
          finding, that they were entitled to a return of the $2,500 that             
          they contributed toward the Bakers' legal action against First              
          Security.  Further, petitioners do not contend, and the record              
          does not show, that a valid debtor-creditor relationship existed            
          between petitioners and the Bakers, or any other person, with               
          respect to the $2,500 in legal expenses.  Rather, petitioners               
          paid the legal fees in order to protect their own interests.                
          Therefore, the $2,500 in legal expenses was not a bona fide debt            
          within the meaning of section 166 and does not give rise to a               
          claim for a bad debt deduction.                                             
                    (c) Conclusion                                                    
               Petitioners have not established that they are entitled to a           
          business bad debt deduction with respect to the worthlessness of            
          the $21,900 in unpaid principal on the second deed, the $9,160 in           
          accrued interest and late fees from the second deed, or the                 
          $2,500 in legal expenses.  Accordingly, respondent is sustained             
          on this issue.                                                              
               Since petitioners are not entitled to a bad debt deduction             
          under section 166, we need not consider whether the debt was a              
          business bad debt or a nonbusiness bad debt.                                
               2.   Legal Expenses in 1992 and 1993                                   
               Section 212 allows an individual to deduct all of the                  
          ordinary and necessary expenses paid or incurred in connection              
          with (1) the production of income, (2) the management,                      

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