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Commissioner, supra; Findley v. Commissioner, 25 T.C. 311, 318
(1955), affd. 236 F.2d 959 (3rd Cir. 1956).
Whether a bad debt deduction is proper must be analyzed
according to "reasonableness, commonsense and economic reality."
Scovill Mfg. Co. v. Fitzpatrick, 215 F.2d 567, 570 (2d Cir. 1954)
(quoting Belser v. Commissioner, 174 F.2d 386, 390 (4th Cir.
1949), affg. 10 T.C. 1031 (1948)). In addition, the
Commissioner’s discretion is not absolute, and the Commissioner
cannot ignore the sound business judgment of a corporation’s
officers. Portland Mfg. v. Commissioner, supra at 73 (upholding
a partially worthless debt deduction where corporate officers
concluded that the debtor had no value as a going concern, and
corporation could recover only the value of the debtor’s assets).
All pertinent evidence is considered in determining
worthlessness. See sec. 1.166-2, Income Tax Regs. The evidence
to be considered includes the value of the collateral securing
the debt and the financial condition of the debtor. Sec. 1.166-
2(a), Income Tax Regs. Legal action to enforce payment is not
required where the surrounding circumstances indicate that a debt
is worthless and legal action would likely not result in
satisfactory relief. Sec. 1.166-2(b), Income Tax Regs. A debt
has been found not to be worthless where the debtor is a going
concern with the potential to earn a future profit. Liggett’s
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