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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). A nonbusiness bad
debt, however, is treated as a short-term capital loss. Sec.
166(d). Petitioners bear the burden of proving that a bona fide
debt exists and that the debt became worthless during the taxable
year in issue. Rule 142(a).
Petitioner has two sons, Jeffrey Barr (Jeffrey) and Stephen
Barr (Stephen). Petitioner has a close relationship with
Jeffrey; however, he is estranged from Stephen for personal
reasons and maintains no contact with him.
Super City Meats, of which Stephen was president and 50
percent co-owner, sold products to various Chinese restaurants.
On September 13, 1990, Jeffrey advanced Stephen $100,000. The
purpose of this advance was to provide working capital for Super
City Meats. The advance was to be used to interview and hire a
new manager, pay off debts to a former supplier, and make
purchases from new suppliers.
A promissory note (the note) in the amount of $100,000 was
executed by Stephen personally and as president of Super City
Meats to Jeffrey several days after the advance, but it was dated
September 13, 1990. Jeffrey required Stephen to sign the note
personally as an added assurance of repayment. The note bore
interest at 13 percent per annum.
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