Thomas A. and Maria M. Hagman - Page 4




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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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