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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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