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INTERNAL REVENUE CODE OF 1954 (3) SECURITIES IN AFFILIATED CORPORATION.—For purposes of
paragraph (1), any security in a corporation affiliated with a taxpayer which is a domestic corporation shall not be treated as a capital asset. For purposes of the preceding sentence, a corporation shall be treated as affiliated with the taxpayer only if— (A) at least 95 percent of each class of its stock is owned directly by the taxpayer, and (B) more than 90 percent of the aggregate of its gross receipts for all taxable years has been from sources other than royalties, rents (except rents derived from rental from properties to employees of the corporation in the ordinary course of its operating business), dividends, interest (except interest received on deferred purchase price of operating assets sold), annuities, and gains from sales or exchanges of stocks and securities. In computing gross receipts for purposes of the preceding sentence, gross receipts from sales or exchanges of stocks and securities shall be taken into account only to the extent of gains therefrom, (h) CROSS R E F E R E N C E S. —
(1) For special rule for banks with respect to worthless securities; see section 582. (2) For disallowance of deduction for worthlessness of securities to which subsection (g)(2)(C) applies, if issued by a political party or similar organization, see section 271. SEC. 166. BAD DEBTS. (a) GENERAL RULE. — (1) WHOLLY WORTHLESS DEBTS.—There
shall be allowed as a deduction any debt which becomes worthless within the taxable year. (2) PARTIALLY WORTHLESS DEBTS.—When satisfied that a debt is recoverable only in part, the Secretary or his delegate may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. (b) AMOUNT OF DEDUCTION. — For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. (c) R E S E R V E FOR B A D D E B T S. — I n lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary or his delegate) a deduction for a reasonable addition to a reserve for bad debts. (d) NONBUSINESS D E B T S. — (1) GENERAL RULE. — I n the
case of a taxpayer other than a corporation— (A) subsections (a) and (c) shall not apply to any nonbusiness debt; and (B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. (2) NONBUSINESS DEBT DEFINED.—For purposes of paragraph
(1), the term "nonbusiness debt " means a debt other than— (A) a debt created or acquired (as the case may be) in connection with a taxpayer's trade or business; or § 165(g)(3)
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