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OPINION
Issue 1. Whether petitioners may deduct loan guaranty payments
and related legal fees under sections 166 and 162
Respondent contends that petitioner's payments in settlement
of his obligations under the various guaranties are deductible as
nonbusiness bad debts, and the attorney’s fees paid by petitioner
in defending against actions to enforce the guaranties are
deductible as miscellaneous expenses under section 212 or 165
(c)(2) rather than as ordinary and necessary business expenses.
Petitioners contend the guaranty payments are deductible as
business bad debts under section 166, and the attorney’s fees are
deductible as ordinary and necessary business expenses under
section 162.
A taxpayer may deduct debts that become worthless in the
taxable year. See sec. 166(a)(1). Section 166 distinguishes
between business and nonbusiness bad debts. Nonbusiness bad
debts of taxpayers other than corporations are short-term capital
losses. See sec. 166(d)(1)(B). A nonbusiness debt is a debt
other than "(A) a debt created or acquired (as the case may be)
in connection with a trade or business of the taxpayer, or (B) a
debt the loss from the worthlessness of which is incurred in the
taxpayer's trade or business." Sec. 166(d)(2). "The crucial
part in the definition of nonbusiness bad debts are the words,
'trade or business.'" Deely v. Commissioner, 73 T.C. 1081, 1092
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