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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
(1958).
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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