- 18 - Stephanie would have received had she sold the property for cash subject to the Great Western first deed of trust and paid the cash to petitioner. As discussed below, petitioner is entitled to treat the excess of the Atascadero loan, $131,828, as a worthless nonbusiness debt under section 166. Section 166 allows a deduction for any debt that becomes worthless within the taxable year. Sec. 166(a)(1). The parties agree that the Atascadero loan was a nonbusiness debt. A nonbusiness debt is any debt that is not created or acquired in connection with a trade or business of the taxpayer. Sec. 166(d)(2)(A). In the case of nonbusiness debt, the deduction is treated as a loss from the sale or exchange of a capital asset held for not more than 1 year. Sec. 166(d)(1)(B). Taxpayers seeking to avail themselves of the so-called bad debt deduction must prove the existence of a bona fide debt, as defined by section 1.166-1(c), Income Tax Regs., and that the debt became wholly worthless during the tax year in which it was deducted, sec. 1.166-5(a)(2), Income Tax Regs. On reply brief, respondent insinuates that the loan payments from petitioner’s profit-sharing plan to Stephanie and David were gifts rather than bona fide debt. This position is diametrically opposed to the characterization respondent has given the payments since 1994. Throughout the course of the examination of the profit-sharing plan and trust, the settlement discussionsPage: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Next
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