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to $15,064. MACS filed a final Form 1120S for its short taxable
year ending June 23, 1981. On their 1981 Federal income tax
return, petitioners claimed a deduction for a business bad debt
in the amount of $15,064. In the notice of deficiency,
respondent determined that petitioners are not entitled to a bad
debt deduction for the 1981 taxable year. On brief, however,
respondent concedes that petitioners are entitled to a deduction
for a bad debt of $15,064 for their 1981 taxable year, but
characterizes the deduction as a nonbusiness bad debt.
A taxpayer who claims a deduction bears the burden of
substantiating the amount and purpose of the item claimed.
Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam
540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
Section 166(a)(1) provides, in general, for the deduction of
debts that become wholly worthless during a taxable year.
Section 166, however, distinguishes between business bad debts
and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income
Tax Regs. Business bad debts may be deducted against ordinary
income if they become wholly or partially worthless during the
year (in the case of the latter, to the extent charged off during
the taxable year as partially worthless debts). Sec. 1.166-3,
Income Tax Regs. To qualify for the business bad debt deduction,
the taxpayer must establish that the debt was proximately related
to the conduct of the taxpayer's trade or business. United
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