Larry M. Levy and Diane Levy - Page 11

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          that an equity investment is subject to the risks, but entitled             
          to share in the profits of the venture), affg. 30 T.C. 519                  
               Accordingly, we conclude that $120,678 (i.e., the total 1991           
          deduction of $445,104 less the $199,426 in guaranty payments made           
          by petitioners and the $125,000 lent pursuant to the note) was a            
          contribution to capital and that petitioners are not entitled to            
          a section 166 deduction.  We further conclude that the $125,000             
          note was a bona fide loan.  The loan evidenced by the note was              
          legally enforceable.  It was made with a profit motive, before              
          the obligation became worthless, and not in the course of                   
          petitioners’ trade or business.  The debt became worthless upon             
          Majestic Jewelers’ default in 1991.  Thus, the loss relating to             
          the loan is deductible in 1991 as a nonbusiness bad debt.                   
          III. Loss Deduction                                                         
               Section 165(a) allows a deduction for certain losses                   
          sustained during the taxable year that are not compensated by               
          insurance or otherwise.                                                     
               Petitioners’ capital interest in JTFJ became worthless in              
          1989, when JTFJ’s assets were transferred to Majestic Jewelers              
          for less than the amount of outstanding debt.  Although                     
          petitioners were entitled to a capital loss deduction in that               
          year, and a carryover, pursuant to sections 1211 and 1212, to the           

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