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Section 166(d) provides that a taxpayer may deduct, as a
short-term capital loss, a nonbusiness debt that becomes
worthless within the taxable year.10 See sec. 1.166-5(a)(2),
Income Tax Regs. First, the debt must be a bona fide debt;
namely, “a debt which arises from a debtor-creditor relationship
based upon a valid and enforceable obligation to pay a fixed or
determinable sum of money.” Sec. 1.166-1(c), Income Tax Regs.
The existence of a bona fide debt is a factual inquiry that turns
on the facts and circumstances of the particular case, and the
taxpayer bears the burden of proving that a bona fide debt
existed. Rule 142(a); Dixie Dairies Corp. v. Commissioner, 74
T.C. 476, 493 (1980); Litton Bus. Sys., Inc. v. Commissioner, 61
T.C. 367, 377 (1973).
Second, the debt must be wholly worthless. Sec. 1.166-
5(a)(2), Income Tax Regs. Whether or not a debt has become
worthless within a particular year is a question of fact, and the
taxpayer bears the burden of proving that the debt became
worthless in that year. Redman v. Commissioner, 155 F.2d 319,
320 (1st Cir. 1946), affg. a Memorandum Opinion of this Court
dated May 15, 1945; Perry v. Commissioner, 22 T.C. 968, 973
(1954). “Where the surrounding circumstances indicate that a
10 Assuming arguendo that the payments in question gave
rise to a debt, then such purported debt is a nonbusiness debt
because it was not created or acquired in connection with
petitioner’s trade or business. See sec. 166(d)(2).
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