Larry M. Levy and Diane Levy - Page 8

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          Respondent contends that the advances and guaranty payments were            
          capital contributions to JTFJ.  Respondent further contends that,           
          even if they were loans, petitioners were not engaged in a trade            
          or business that would allow these payments to be characterized             
          as business bad debts.                                                      
               Section 166 allows a deduction for any debt that becomes               
          worthless during the taxable year and distinguishes between                 
          business and nonbusiness bad debts.  A business bad debt is a               
          debt that is proximately related to the taxpayer’s trade or                 
          business.  See Whipple v. Commissioner, 373 U.S. 193, 201 (1963);           
          sec. 1.166-5, Income Tax Regs.  Nonbusiness bad debts are treated           
          as short term capital losses and are subject to the section 1211            
          limitations on capital losses.  See sec. 166(d)(2).                         
               a.   The Guaranty Payments                                             
               Petitioners were not in the trade or business of acting as a           
          guarantor.  Larry Levy’s consulting business did not guarantee              
          the debts of any corporation.  See sec. 1.166-9(a), Income Tax              
          Regs.  In addition, the guaranties were not made to protect                 
          petitioners’ trade or business as employees of JTFJ, because                
          protection of their status as employees was not the dominant                
          motivation for making the guaranties.  See United States v.                 
          Generes, 405 U.S. 93, 103 (1972) (stating that to qualify for the           
          business bad debt deduction the taxpayer’s trade or business must           
          be the dominant motivation for making the guaranties).  Larry               

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