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Bearing heavily against petitioner because of the ambiguity
and inexactitude of the proof it offered, we hold that petitioner
is entitled to a $500,000 deduction for 1997 with respect to
CKS’s participation in the NSI tax deal. See Cohan v.
Commissioner, 39 F.2d 540, 544 (2d Cir. 1930).
IV. Petitioner’s Advances to Koehler
Petitioner advanced $76,705 to Koehler before 1996.
Petitioner acknowledges that it mistakenly deducted this $76,705
as a miscellaneous expense on its 1996 taxable year return.
Petitioner now asserts it is entitled to deduct the $76,705 as a
business bad debt.
Section 166(a) permits a deduction for debts that become
worthless during a taxable year. Petitioner contends that its
advances to Koehler became wholly worthless during petitioner’s
1996 taxable year, and that it is entitled to deduct those
advances as wholly worthless debts under section 166(a)(1).25
A bad debt is deductible only for the year in which it
becomes worthless. Sec. 166(a)(1); Dustin v. Commissioner, 53
T.C. 491, 501 (1969), affd. 467 F.2d 47, 48 (9th Cir. 1972). For
purposes of section 166, the debt must be a bona fide debt; i.e.,
one which arises under a debtor-creditor relationship and is
based on a valid and enforceable obligation to pay a fixed and
25Petitioner has not claimed that it is entitled to deduct
those advances as partially worthless debts under sec. 166(a)(2).
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