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The structure of the transactions ensured that there was no
source of funds for Properties. Respondent’s hypothesizing over
what could or should have been done ignores the realities of the
business and is unreasonable. Respondent’s determination that
the Properties loan was not worthless in 1995 therefore was
arbitrary, unreasonable, and an abuse of discretion.
We find that the Properties loan was partially worthless in
1995.
Bad Debt Deduction Where Creditor’s Actions Contribute to
Worthlessness
We next consider whether petitioner may deduct the
Properties loan as partially worthless although the legitimate
business decisions of petitioner’s predecessor, Bottlers,
contributed to the worthlessness of the Properties loan.
Respondent argues that Bottlers failed to pay the full amount of
rent, which, in turn, caused Properties to be unable to repay the
loan. Respondent argues that petitioner is therefore not
entitled to the deduction. We disagree. Petitioner’s legitimate
business decisions contributing to the worthlessness of the
Properties loan do not preclude the bad debt deduction.
It is well settled that certain actions of a creditor do
preclude bad debt deductions. For example, a taxpayer may not
voluntarily release a solvent debtor and then claim a deduction
for a worthless debt. Roth Steel Tube Co. v. Commissioner, 620
F.2d 1176 (6th Cir. 1980), affg. 68 T.C. 213 (1977); Am. Felt Co.
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