- 7 -
In 1993, the first mortgage lenders foreclosed on the Corbin
properties. Petitioners did not receive any distribution as a
result of the foreclosure.
Petitioner did not commence a lawsuit against Mr. Magness to
collect the money. Petitioner’s attorney advised him not to
attempt to collect the money from Mr. Magness because it would be
useless to do so. Mr. Magness never repaid any of the funds
advanced by petitioner.
On their Federal income tax return for 1993, petitioners
claimed the purported loan was worthless and deducted $200,000
from their taxable income as a business bad debt under section
166. Respondent disallowed the deduction.
OPINION
Section 166 authorizes a deduction for a business bad debt
that becomes worthless during the year. To be entitled to the
deduction, an individual taxpayer must prove (1) the existence of
a bona fide debt that obligated the debtor to pay the taxpayer a
fixed or determinable sum of money and (2) that the bad debt was
created or acquired in "proximate” relation to the taxpayer's
trade or business. United States v. Generes, 405 U.S. 93, 96
(1972); Calumet Indus., Inc. v. Commissioner, 95 T.C. 257, 284
(1990).
The Court of Appeals for the Ninth Circuit, to which this
case is appealable, has identified 11 factors to be considered
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011