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Second, we hold that IRA is not entitled to bad debt
deductions for the $84,889 and $12,185 writeoffs of the Ballard
and Lisle notes. Between 1982 and 1987, IRA or IFI paid Ballard
and Lisle $196,648 and $28,284, respectively, and reflected the
payments as notes receivables in those amounts from Ballard and
Lisle. IRA did not pay the funds to Ballard and Lisle as loans,
but rather as part of the moneys earned by Ballard and Lisle for
their role in the Prudential income scheme. In addition, the
record contains no notes or other written documentation of an
acknowledgment by Ballard or Lisle of purported debts to IRA and
IFI. There is no evidence that IRA charged any interest to
Ballard or Lisle, collected any interest from them, or demanded
any collateral with respect to the purported loans. Both Ballard
and Lisle disputed that their alleged debts to IRA existed. In
1987, when IRA wrote off the purported notes, neither Ballard nor
Lisle reported the discharge of this indebtedness as income on
their respective 1987 income tax return or subsequent returns.
Therefore, IRA failed to establish that any valid debt from
Ballard or Lisle existed that could be written off in 1987. But
even if valid debts existed, the evidence shows that both Ballard
and Lisle had sufficient resources in 1987 to pay in full to IRA
the alleged notes receivable. Consequently, IRA failed to
establish that the alleged notes receivable became worthless in
1987.
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