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Lakeview to William.
b. Bad Debt Deduction
Petitioner alternatively contends that William's diversions
of corporate funds gave rise to a debt by operation of law that
was owed to Lakeview, and that this debt became worthless in
1992, thereby entitling it to a bad debt deduction under section
166(a)(1).
Section 166(a)(1) allows a deduction for "any debt which
becomes worthless within the taxable year." Under section 1.166-
1(c), Income Tax Regs., the debt must be "bona fide", defined as
"a debt which arises from a debtor-creditor relationship based
upon a valid and enforceable obligation to pay a fixed or
determinable sum of money."
The existence of a debt for purposes of section 166
ordinarily requires a showing that contemporaneously with a
transfer of money the transferor and recipient both intend to
establish an enforceable obligation of repayment. Delta Plastics
Corp. v. Commissioner, 54 T.C. 1287, 1291 (1970); Fisher v.
Commissioner, 54 T.C. 905, 909-910 (1970). Here, however,
petitioner argues that a debt arose not from the parties' intent,
but by operation of law, relying on Iowa S. Utils. Co. v. United
States, 348 F.2d 492 (Ct. Cl. 1965). In that case, the Court of
Claims held that an intent to create a debtor-creditor
relationship is unnecessary to create a bona fide debt where the
debt arises by operation of law.
Petitioner's argument fails for several reasons. First,
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