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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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