My dad lent his brother-in-law a substantial amount of money 10 years ago, and never paid it back due to his new wife's need to live well. After 7 years in court, we got back the approx. amount of the loan, plus a judgment for much more. That was all the money our lawyers could get their hands on (pure luck...we had the number of a CD they were hiding). Soon after that they went into bankruptcy and my dad is a major creditor, but never collected on this and never will. So we are wondering if this large uncollected amount is deductible, even though it exceeds original loan.
I found a similar tax case online - but it involved personal injury judgment so no actual monetary loss other than the uncollected judgment- with the following written in the final judgment:
Section 165(c) provides a deduction from income for taxpayers who incur an uncompensated loss relating to a trade or business, to a transaction entered into for profit, or to a casualty resulting in an uncompensated loss of property
So my question is, even though my dads business is not money lending, it was a "transaction entered into for profit" in the sense that a market interest was mentioned on the note. Or does the fact that he primarily did it out of familial loyalty outweigh that?