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not pay 25 percent of the profit to petitioner in accord with the
agreement. In 1984, petitioner sued Mr. MacCoon for the
outstanding balance of the note and petitioner’s 25-percent share
of the profits from the sale of the adjacent land ($100,000).
Petitioner and Mr. MacCoon reached a settlement in the lawsuit.
Mr. MacCoon was no longer obligated to pay the note following the
settlement. Petitioner provided no other information regarding
the settlement. Petitioners claimed a $65,000 short-term capital
loss attributable to the MacCoon note on their 1988 return.
Respondent disallowed the claimed capital loss.
OPINION
We must decide whether petitioners are entitled to a non-
business bad debt deduction on their 1988 return. Generally,
taxpayers may deduct the value of bona fide debts owed to them
that become worthless during the year. Sec. 166(a); Millsap v.
Commissioner, 46 T.C. 751, 762 (1966), affd. 387 F.2d 420 (8th
Cir. 1968). Bona fide debts generally arise from valid debtor-
creditor relationships reflecting enforceable and unconditional
obligations to repay fixed sums of money. Sec. 1.166-1(c),
Income Tax Regs. Section 166 prescribes three ways in which
deductions may be taken for worthless debts: (1) As an ordinary
deduction during a taxable year in which a business bad debt
becomes completely worthless; (2) as an ordinary deduction when a
business bad debt becomes partially worthless during the taxable
year, but only to the extent worthless; and (3) as a short-term
capital loss when a nonbusiness bad debt held by a taxpayer other
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