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least a portion of the $2 million loan. Petitioners have not
provided credible evidence of worthlessness.
Because we hold that petitioners have failed to provide
credible evidence that the $2 million loan became worthless in
1997, it necessarily follows that petitioners are entitled to
neither a $2 million nonbusiness bad debt deduction nor a $2
million business bad debt deduction for the alleged worthlessness
arising in 1997.
V. Worthless Stock Loss
A. Law
Section 165(g)(1) provides that, if any security that is a
capital asset becomes worthless during the taxable year, the
resulting loss shall be treated as a loss from the sale or
exchange of a capital asset. Section 165(g)(2)(A) provides that
the term “security” includes stock in a corporation.
The principles for establishing the worthlessness of stock
in a particular taxable year are virtually identical to the
principles for establishing a worthless debt. Those principles
are succinctly set forth in Morton v. Commissioner, 38 B.T.A.
1270, 1278-1279 (1938), affd. 112 F.2d 320 (7th Cir. 1940), as
follows:
The ultimate value of stock, and conversely its
worthlessness, will depend not only on its current
liquidating value, but also on what value it may
acquire in the future through the foreseeable
operations of the corporation. Both factors of value
must be wiped out before we can definitely fix the
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