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sec. 7872. In addition, petitioner testified that he viewed the
Atascadero loan as an investment for his profit-sharing plan.
Stephanie testified that the funds were loans, and that she had
always intended to repay the amounts borrowed. We found
petitioner and Stephanie to be credible, forthright, and
believable in all respects. The advances from petitioner’s
profit-sharing plan to Stephanie and David were bona fide debt.
We go on to examine whether the debt became worthless in 1995.
The worthlessness requirement for nonbusiness debts is
interpreted strictly: The deduction is unavailable if even a
modest fraction of the debt can be recovered. Bodzy v.
Commissioner, 321 F.2d 331, 335 (5th Cir. 1963) (“last vestige of
value” must have “disappeared”), affg. T.C. Memo. 1962-40;
Clanton v. Commissioner, T.C. Memo. 1995-416 (“partial
worthlessness is insufficient”); sec. 1.166-5(a)(2), Income Tax
Regs. This “hard line” approach is taken because the parties to
nonbusiness debts are typically members of the same family. The
requirement of total worthlessness minimizes the opportunities
for taxpayers to claim deductions for gifts to family members.
Buchanan v. United States, 87 F.3d 197, 199 (7th Cir. 1996).
To prove the worthlessness of a nonbusiness debt, a taxpayer
must be able to point to some particular event or group of facts
2(...continued)
compounding. In August 1991, when the loans were consolidated,
the rate was 6.81 percent. See Rev. Rul. 90-1, 1990-1 C.B. 155;
Rev. Rul. 91-41, 1991-2 C.B. 352.
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