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Co. Therefore, IRA and Holding Co. were members of a brother-
sister controlled group under section 1563(a)(2), which is
incorporated by reference in section 267(b)(3) and (f).
Finally, IRA failed to establish that any of the alleged
debts became wholly worthless in 1985, and, consequently, it is
not entitled to bad debt deductions.
Pursuant to section 166(a)(1), a deduction is allowed for
any debt which becomes worthless within the taxable year. When
satisfied that a business debt is recoverable only in part, the
Commissioner may allow such debt, as a deduction, in an amount
not in excess of the part charged off within the taxable year.
See sec. 166(a)(2). As shown above, the notes were not wholly
worthless because some of the notes were later paid in full and
partial payments were made on others. Sec. 1.166-3(a)(2)(i),
Income Tax Regs., provides generally that if the District
Director is satisfied that a debt is partially worthless, the
amount which has become worthless will be allowed as a deduction
under sec. 166(a)(2), "but only to the extent charged off during
the taxable year." No portion of the notes owing to IRA was
charged off during the taxable year on its books and records.
The deduction for partial worthlessness is at the discretion of
the Commissioner and should not be interfered with by the Courts
unless the Commissioner was plainly arbitrary and unreasonable.
See Strahan v. Commissioner, 42 F.2d 729, 731 (6th Cir. 1930).
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