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Some of the facts have been stipulated and are so found.
The stipulated facts and the accompanying exhibits are
incorporated herein by this reference. At the time the petition
in this case was filed, petitioners resided in Paradise Valley,
Arizona.
For convenience, we combine our findings of fact with our
opinion under each separate issue heading.2
Issue 1. Bad Debt
Respondent determined that for 1990 petitioners were not
entitled to a $500,000 business bad debt deduction related to
their disposition of Washington Chocolate.
Section 166 entitles a taxpayer to a deduction for a bad
debt that becomes worthless during the taxable year. A business
bad debt can be deducted from ordinary income if it is either
partially or totally worthless. Sec. 166(a). Only a bona fide
debt is deductible. Sec. 1.166-1(c), Income Tax Regs.
Petitioners bear the burden of proving that a bona fide business
debt exists and that the debt became worthless during the taxable
year in issue. Rule 142(a); Crown v. Commissioner, 77 T.C. 582,
598 (1981); Rude v. Commissioner, 48 T.C. 165, 172 (1967).
From July 25, 1986, until May 26, 1989, petitioners were the
sole shareholders of Washington Chocolate, a subchapter S
2 We have considered each of the parties' arguments and,
to the extent that they are not discussed herein, find them to be
unconvincing.
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