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connection with the computation of adjusted gross income.
Respondent, on the other hand, allowed the loss as an itemized
deduction in arriving at taxable income. There is also a dispute
about whether the loss is $85,009 or $86,040. Finally, we must
decide whether petitioners are liable for an addition to tax
under section 6651(a)(1) and/or an accuracy-related penalty under
section 6662.
Treatment of the Bad Debt
Section 166 provides that a business bad debt is deductible
as an ordinary deduction for the year in which the debt becomes
worthless. Specifically, section 166(a)(1) provides: “There
shall be allowed as a deduction any debt which becomes worthless
within the taxable year.” Section 166(d)(1)(A) further provides
that in the case of a taxpayer other than a corporation
“subsection (a) shall not apply to any nonbusiness debt”.
Section 166(d)(2)(A) and (B) defines a nonbusiness debt as a debt
other than:
(A) a debt created or acquired * * * in connection
with a trade or business of the taxpayer; or
(B) a debt the loss from the worthlessness of
which is incurred in the taxpayer’s trade or business.
Therefore, subsection (a) allows an ordinary loss deduction only
for business bad debts.
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Last modified: May 25, 2011