- 17 -
determining worthlessness, the value of any collateral as well as
the financial condition of the debtor will be taken into
consideration. Sec. 1.166-2(a), Income Tax Regs. Facts are
sufficient to show worthlessness where debt is uncollectible and
legal action to enforce payment would probably not result in
satisfaction of a judgment. Sec. 1.166-2(b), Income Tax Regs. A
debt is "worthless" where it lacks present value and appears to
lack potential for collectibility at any time in the future.
Dustin v. Commissioner, 53 T.C. 491, 501 (1969), affd. 467 F.2d
47 (9th Cir. 1972); LeLandais v. Commissioner, T.C. Memo. 1976-
345. "Bankruptcy is generally an indication of the worthlessness
of at least part of an unsecured and unpreferred debt." Sec.
1.166-2(c), Income Tax Regs.
Petitioner claimed the debts at issue here as a lump-sum
deduction for total worthlessness on his Schedule C for 1993.
Respondent argues that even if petitioner was lending money as a
trade or business, he has not shown his bases in the amounts lent
or established that the debts were wholly worthless in 1993.
The Court examines first the issue of worthlessness.
Section 166(a)(1) provides that for debts that become wholly
worthless within the taxable year "there shall be allowed" a
deduction. In contrast, under section 166(a)(2) Congress has
provided the Secretary with discretion. He "may allow" the
deduction of a partially worthless debt in an amount "not in
Page: Previous 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 NextLast modified: May 25, 2011