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demonstrates that petitioner indemnified Ms. Smith against
Federal income tax liabilities for the 1986 tax year pursuant to
the 1988 settlement agreement. However, petitioners have made no
contentions and offered no evidence that petitioner entered into
the aforementioned agreement in the course of his trade or
business or a transaction for profit. Consequently, we conclude
that petitioners failed to demonstrate that petitioner’s payment
of Ms. Smith’s 1986 tax liability constitutes a worthless debt
for purposes of section 166. See sec. 1.166-9(d)(1), Income Tax
Regs. Accordingly, we hold that petitioners are not entitled to
deduct the payment as either a worthless business debt pursuant
to section 166(a) or as a worthless nonbusiness debt pursuant to
section 166(d).
Addition to Tax for Failure To File
Respondent contends that petitioners did not file their 2000
Federal income tax return within the time prescribed by law and,
consequently, that petitioners are liable for an addition to tax
pursuant to section 6651. Petitioners contend that their bank
and tax records were the subject of a subpoena related to
petitioner’s bankruptcy case, that the records were not returned
to them until November of 2001 despite petitioner’s repeated
demands, that the records were out of order upon their return,
and, consequently, that petitioners were unable to timely file
their 2000 Federal income tax return.
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