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wholly separate organization that operated free and clear of
Pharmacare’s former debt, and any claims that petitioner had
against Pharmacare were resolved with that corporation’s
bankruptcy discharge. The latest date when the loss would have
been realized was 1982, the year petitioner filed his claim
against the bankruptcy estate of Pharmacare. At that point, he
had no realistic possibility of recovery. See Morton v.
Commissioner, 38 B.T.A. 1270, 1278-1279 (1938), affd. 112 F.2d
320 (7th Cir. 1940); Mack v. Commissioner, T.C. Memo. 1995-482;
sec. 1.165-1(d), Income Tax Regs. Therefore, the loss could only
be used by petitioners as a section 172 net operating loss (NOL)
carryover or capital loss carryover during the years in issue,
depending on the character of the loss.
The $450,000 loss, arising from the Freedom Federal loan
proceeds, was realized by petitioner in 1985. A bad debt
deduction is realized in the year it becomes worthless. See sec.
1.166-1(a), Income Tax Regs. The question of when a bad debt
becomes worthless is a factual question based on all of the
surrounding circumstances. Although bankruptcy is a strong
indicator of when a debt becomes worthless, it is not an absolute
rule that a loss becomes recognizable upon the filing of a
petition in bankruptcy. See sec. 1.166-2, Income Tax Regs.
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