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In the notice of deficiency, respondent disallowed for
taxable year 1994 petitioner’s partnership loss deduction of
$64,559 attributable to his pro rata share of a business bad
debt.4 Respondent also determined for taxable years 1994 and
1995 accuracy-related penalties on the business bad debt and
other issues petitioner has conceded.
Discussion
Section 166(a) generally allows a deduction for bona fide
debts that become wholly or partially worthless within the
taxable year. A business bad debt is fully deductible from
ordinary income. Sec. 166(d)(1). A bona fide debt “arises from
a debtor-creditor relationship based upon a valid and enforceable
obligation to pay a fixed or determinable sum of money.” Sec.
1.166-1(c), Income Tax Regs. Whether the parties actually
intended the transactions to be loans depends on whether the
advances were made “with a reasonable expectation, belief and
intention that they would be repaid.” Goldstein v. Commissioner,
T.C. Memo. 1980-273.
The objective indicia of a bona fide debt includes whether a
note or other evidence of indebtedness existed and whether
interest was charged. Clark v. Commissioner, 18 T.C. 780, 783
(1952), affd. 205 F.2d 353 (2d Cir. 1953). We also consider the
existence of security or collateral, the demand for repayment or
4 See supra note 1.
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