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Shop, and, on their 1993 tax return, deducted these loans as a
“business loan loss”.
In 1994, petitioners paid $10,745 to various creditors of
the Stork Shop for ordinary and necessary business expenses that
it had incurred. On their 1994 tax return, petitioners deducted
the $10,745 as business expenses relating to the Stork Shop.
OPINION
I. Bad Debt Deduction
Section 166 allows a deduction for any debt that becomes
worthless during the taxable year and distinguishes between
business and nonbusiness debts. A business bad debt must be
related to the taxpayer’s trade or business. See sec. 166(d)(2).
Respondent concedes that petitioners’ loans to the Stork
Shop became worthless in 1993, but we must determine whether
those loans related to petitioners’ trade or business. Although
they devoted time and energies to the affairs of the Stork Shop,
petitioners earned no income from the corporation. Cf. Whipple
v. Commissioner, 373 U.S. 193, 203 (1963) (stating that someone
in a trade or business gets “income received directly for his own
services rather than indirectly through the corporate
enterprise”). Petitioners’ efforts were consistent with those of
shareholders or of a dutiful son and daughter-in-law. See Garner
v. Commissioner, 987 F.2d 267, 271 (5th Cir. 1993) (upholding
conclusion that shareholder-employee’s motive was to protect his
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Last modified: May 25, 2011