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Earnest money payments made on 7/1/90 and l/1/91 $4,000
The $250 portion of the lease payments each month
that were to be applied to the purchase price 4,750
Plumbing repairs made during contract period 969
Total $9,719
On brief, petitioners increased the amount claimed to $9,819 to
include the $100 amount paid when the earnest money contract was
entered into. Although the amount claimed on their 1991 return
was based on a loss from the sale or exchange of a capital asset,
petitioners on brief contend that the $9,819 was a nonbusiness
bad debt under section 166 instead of a loss from the sale or
exchange of a capital asset.
In general, section 166(a) allows a deduction for any debt
that becomes worthless during the taxable year. However, section
166 distinguishes between business bad debts and nonbusiness bad
debts. See sec. 166(d); sec. 1.166-5(b), Income Tax Regs.
Business bad debts may be deducted against ordinary income to the
extent that such debts become wholly or partially worthless
during the year. In contrast, nonbusiness bad debts may be
deducted, but only as short-term capital losses, and only if the
debts are wholly worthless in the year claimed. Petitioners
acknowledge that the claimed debt would be characterized as a
nonbusiness bad debt.
A deduction for a bad debt is limited to a bona fide debt.
See sec. 1.166-1(c), Income Tax Regs. A bona fide debt is
defined as one that arises from a debtor-creditor relationship
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