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debt became worthless during 1990.
Section 166(a)(1) provides, in general, for the deduction of
debts that become wholly worthless during a taxable year. The
bad debt deduction is limited to a bona fide debt; that is, a
debt that arises from a debtor-creditor relationship based upon a
valid and enforceable obligation to pay a fixed or determinable
sum of money. Sec. 1.166-1(c), Income Tax Regs. For purposes of
section 166, a contribution to capital is not considered a debt.
In re Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir. 1976); Kean v.
Commissioner, 91 T.C. 575, 594 (1988); sec. 1.166-1(c), Income
Tax Regs.
Characterization of an advance as either a loan or a capital
contribution is a question of fact which must be answered by
reference to all of the evidence, with the burden on the taxpayer
to establish that the alleged loans were bona fide debts. Rule
142(a); Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493
(1980); Yale Ave. Corp. v. Commissioner, 58 T.C. 1062, 1073-1074
(1972). Objective factors are to be considered, and the
taxpayer's subjective intent alone is not conclusive of the issue
of characterizing an advance as debt or equity. In re Uneco,
Inc., supra at 1209.
Deductions are a matter of legislative grace, and
petitioners bear the burden of proving that they are entitled to
the deductions claimed. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. at 84; New Colonial Ice Co. v. Helvering,
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