William J. Fleischaker and Donni L. Fleischaker - Page 20

                                        - 20 -                                         

          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             

Page:  Previous  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  29  Next

Last modified: May 25, 2011