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Accordingly, petitioners have failed to show that respondent
erred by using $3,000 as cash on hand. Therefore, respondent’s
reconstruction of petitioner’s income is upheld in full.
Have Petitioners Shown That Advances to Petitioner’s Father Were
Loans and That They Became Worthless During 1992?
We next consider whether petitioner is entitled to a section
166 bad-debt deduction for advances made to or on behalf of his
father. Petitioners argue that they are entitled to ordinary
loss treatment because the advances were loans made in
furtherance of petitioner’s trade or business and that said loans
became worthless when the auction was destroyed by fire in 1992.
Respondent argues that the advances petitioner made were gifts
which did not have the requisite characteristics of a bona fide
debt for the purposes of section 166.3
In order to maintain an ordinary loss deduction for a bad
debt, a taxpayer must demonstrate that the advances qualify for
section 166 treatment. See White v. United States, 305 U.S. 281
(1938); United States v. Virgin, 230 F.2d 880 (5th Cir. 1956). A
taxpayer’s entitlement to section 166 treatment depends upon a
showing that a bona fide debt existed and that the debt became
uncollectible during the year in which the deduction is claimed.
See sec. 166; Rule 142(a); Welch v. Helvering, 290 U.S. 111
3 Petitioners did not claim this loss on their returns.
Instead, the loss was claimed in an attempt to offset
respondent’s deficiency determination. Because of our holding,
this issue has no effect on the deficiency determined or the
accuracy-related penalties.
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