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trade or business was announced in United States v. Generes,
supra at 103, as follows:
in determining whether a bad debt has a "proximate"
relation to the taxpayer's trade or business, as the
Regulations specify, and thus qualifies as a business
bad debt, the proper measure is that of dominant
motivation, and that only significant motivation is not
sufficient.
Dominant motivation is determined at the time the taxpayer makes
the loan, Harsha v. United States, 590 F.2d 884 (10th Cir. 1979),
and is a question of fact to be decided on the basis of the
entire record. See Putoma v. Commissioner, 66 T.C. 652 (1976),
affd. 601 F.2d 734 (5th Cir. 1979).
Nonbusiness bad debts, on the other hand, may be deducted,
but only if they become entirely worthless during the year
claimed; they are, moreover, to be treated as short-term capital
losses. See sec. 166(d). Generally, a nonbusiness bad debt is a
debt other than a debt (1) created or acquired in the trade or
business of the taxpayer or (2) the loss from the worthlessness
of which is incurred in a trade or business of the taxpayer. See
sec. 166(d)(2). Whether a debt is characterized as business or
nonbusiness is a question of fact. See sec. 1.166-5(b)(2),
Income Tax Regs. The burden is on petitioner to prove that she
was engaged in a trade or business, and that her worthless loans
constituted business rather than nonbusiness bad debts. See Rule
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Last modified: May 25, 2011