William King Alt and Barbara G. Alt - Page 5

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          advice, Michael executed in favor of petitioners an unsecured               
          promissory note in the amount of $55,000.                                   
               As to the $42,000 petitioners provided Michael for working             
          capital, no such note was executed by Michael.  At trial,                   
          petitioners explicitly testified that they really never expected            
          to collect the $42,000, which came from their savings, but that             
          they expected repayment of the $55,000.                                     
               On their Federal income tax return for 2000, petitioners               
          claimed a business bad debt deduction of $55,000.  In 2003,                 
          petitioners filed an amended income tax return to reflect the               
          $55,000 as a nonbusiness bad debt.2                                         
               In the notice of deficiency, respondent disallowed the                 
          nonbusiness bad debt deduction on the ground that there was no              
          valid debtor/creditor relationship between petitioners and                  
               The Court disagrees with that determination.  Section                  
          166(d)(1) provides, with respect to a taxpayer other than a                 
          corporation, that, where a nonbusiness bad debt becomes wholly              
          worthless within the taxable year, the loss shall be considered a           

               2Even though Michael made a few payments to the bank on the            
          $55,000 note, no evidence was offered at trial as to whether any            
          of those payments were applied to the principal of the note.  The           
          Court assumes that the entire principal amount of $55,000 was               
          owing at the time petitioners filed their 2000 income tax return,           
          since the actual amount of the indebtedness was not made an                 

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