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advancing money, was very limited.3 There is no evidence that he
received any salary from the corporations.
Aaland became ill at an unspecified time in the early 1990's
and subsequently died in 1993 or 1994.
On their 1992 joint Federal income tax return, petitioners
claimed a business bad debt deduction with respect to Aaland’s
outstanding debt. They carried back a portion of the resulting
net operating loss to their 1990 taxable year, generating a full
refund of the tax paid for that year, in the amount of $21,890.
In the notice of deficiency for the 1990 taxable year, respondent
disallowed the carryback of the net operating loss, resulting in
a deficiency in the amount of the refund. Respondent argues that
the funds advanced by petitioner to Aaland gave rise to a
nonbusiness bad debt in 1992 and therefore are deductible only as
a short-term capital loss that cannot be carried back.4
Discussion
Section 166(a) generally allows a deduction for debts that
become wholly or partially worthless within the taxable year. In
3 On direct examination, petitioner testified as follows:
Mr. O’Day: Did you continue any types of activities
with the corporations after you stopped
farming [in 1984]?
Petitioner: Oh, yes.
Mr. O’Day: What types of involvement did you have?
Petitioner: Like I had before.
Mr. O’Day: What would those be?
Petitioner: Loan someone money like a darn fool.
4 Respondent has not raised any issue as to whether the
purported debts at issue in fact became worthless in 1992.
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