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Roderick are of doubtful accuracy. To the extent such payments
were made, petitioner did not keep a written log of Roderick’s
hours or duties, nor did he explain how he determined Roderick’s
compensation. As a result, it is not clear whether the payments
represent reasonable compensation for the services, if any, that
Roderick performed. Roderick’s failure to report the $5,460
casts further doubt on the deductibility of the payments, as does
petitioner’s failure to timely file information returns. See
Haeder v. Commissioner, supra; Martens v. Commissioner, supra.
Accordingly, petitioners have failed to meet their burden of
proof, and respondent’s determination is sustained to the extent
of $24,510.89.
C. Bad Debt Expense
In general, section 166(a)(1) allows as a deduction any debt
which becomes worthless within the taxable year. Business debts
may be deducted against ordinary income to the extent that such
debts become wholly or partially worthless during the year.
Nonbusiness debts also may be deducted, but only in the same
manner as short-term capital losses, and only if the debts are
wholly worthless in the year claimed. Sec. 166(d); sec.
1.166-5(a)(2), Income Tax Regs. Section 166(d)(2) provides
generally that a “nonbusiness debt” means a debt other than a
debt created or acquired in connection with a trade or business
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Last modified: May 25, 2011