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For all of these reasons, we conclude that petitioners have
failed to satisfy their burden of proving that they sustained a
theft loss in 1992 within the meaning of section 165.
Do the Amounts Deducted Qualify as Business Bad Debts Under
Section 166?
As another alternative argument, petitioners contend that
they are entitled to a business bad debt deduction under section
166. Section 166 permits a deduction for any debt that becomes
worthless within the taxable year. Nonbusiness bad debts are
treated as losses resulting from the sale or exchange of a short-
term capital asset. See secs. 166(d)(1), 1211(b), 1212(b).
Business bad debts are deductible as ordinary losses to the
extent of the taxpayer’s adjusted basis in the debt. See sec.
166(b).
Petitioners base their claim to a business bad debt
deduction on the promissory note allegedly executed in favor of
James by Michael Donnelly and Brian Wilcox in the face amount of
$611,750. The promissory note bore no interest and was payable
on demand on or after February 20, 1992. It is not clear whether
petitioners are contending that this promissory note supports a
business bad debt deduction for both James and Christopher, nor
is it clear what amount petitioners are claiming.
Whatever petitioners’ contentions are concerning this issue,
petitioners must first establish that (1) a bona fide debt
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