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Where the surrounding circumstances indicate a debt is
worthless and uncollectible, and the legal action to enforce
payment in all probability would not result in satisfaction on
execution of a judgment, a showing of these facts will be
sufficient evidence of the worthlessness of the debt. Sec.
1.166-2(b), Income Tax Regs. We have allowed a bad debt
deduction where the taxpayer received advice of legal counsel,
based on objective facts, that the cost of recovery would exceed
the amount of the debt. See Johnstone v. Commissioner, 17 B.T.A.
366, 368 (1929); United States Tool Co. v. Commissioner, 3 B.T.A.
492 (1926); Green v. Commissioner, T.C. Memo. 1976-127.
Nevertheless, a debt is not worthless merely because it may be
difficult to collect. Reading & Bates Corp. v. United States, 40
Fed. Cl. 737, 757 (1998). To be entitled to a deduction under
section 166(a)(1), a taxpayer must exhaust all reasonable means
of collection or prove that such steps would be futile. H.D. Lee
Mercantile Co. v. Commissioner, 79 F.2d 391, 393 (10th Cir.
1935); Perry v. Commissioner, 22 T.C. 968, 974 (1954); A.
Finkenberg's Sons, Inc. v. Commissioner, 17 T.C. 973, 984 (1951).
Choosing not to enforce a debt does not render it worthless.
Southwestern Life Ins. Co. v. United States, 560 F.2d 627, 644
(5th Cir. 1977).
6(...continued)
to the $490,000 received for his Lakeview stock and the $75,000
received for his half interest in the Fence Property. During
1992, William received another check for $75,000 from Lakeview.
In addition, William owned several parcels of real estate.
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