## Facts

- Christina Diez-Arguelles divorced Kevin Baxter in 1972; she received custody of their two minor children, and Baxter was ordered to make periodic child-support payments.
- Baxter failed to make required payments over multiple years, creating substantial child-support arrears.
- Christina attempted to collect the arrears through the divorce court but did not obtain payment.
- Christina later married Ernesto A. Diez-Arguelles; the couple bore the children’s support costs with their own funds.
- For 1978 and 1979, petitioners claimed deductions treating the unpaid child-support arrears as nonbusiness bad debts under I.R.C. § 166(d), reporting short-term capital losses.
- The Commissioner disallowed the deductions and determined deficiencies for 1978 and 1979.
- Petitioners challenged the deficiencies in Tax Court; the cases were consolidated for trial, briefing, and opinion.

## Issues

1. Whether a custodial parent’s right to unpaid child-support arrears constitutes a “debt” within the meaning of I.R.C. § 166.
2. If a qualifying debt existed, whether petitioners proved the debt became wholly worthless in 1978 and 1979 so as to permit nonbusiness bad-debt deductions.

## Decision

- The Tax Court sustained the Commissioner’s disallowance of the claimed § 166(d) nonbusiness bad-debt deductions.
- The court concluded that unpaid child-support arrears did not constitute the type of bona fide debt contemplated by § 166 for bad-debt treatment.
- The court rejected the argument that petitioners’ out-of-pocket support of the children effectively created a deductible receivable against the nonpaying former spouse.
- The court further determined that, even assuming a debt, petitioners did not establish whole worthlessness in the specific years claimed.

## Legal Principles

- A § 166 deduction requires a bona fide debt: a valid, enforceable obligation arising from a creditor-debtor relationship to pay a fixed or determinable sum of money.
- Nonbusiness bad debts under § 166(d) are deductible only when they become wholly worthless within the taxable year and are treated as short-term capital losses.
- Domestic support obligations and the custodial parent’s expenditures for child support are treated as personal/family matters for federal income tax purposes and generally do not create deductible bad-debt losses.
- The taxpayer bears the burden to prove worthlessness in the claimed year with objective evidence showing no reasonable prospect of recovery.

## Conclusion

The Tax Court held that unpaid child-support arrears could not be converted into nonbusiness bad-debt deductions under I.R.C. § 166, and it upheld the Commissioner’s deficiency determinations for 1978 and 1979.


Diez-Arguelles v. Commissioner, 48 T.C.M. (CCH) 496 (T.C. 1984)