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Respondent concedes that the debts associated with Northwest
and accrued by petitioner prior to October 10, 1988, are
deductible as bad debts. Respondent argues that the funds
advanced and the units shipped after October 10, 1988, were
capital contributions. Thus, of the $2,698,658.73 bad debt
deduction taken by petitioner for the year ended June 30, 1989,
only $1,933,944.10 remains in dispute. The $1,933,944.10
consists of the note given to petitioner by Northwest dated
October 11, 1988, in the amount of $345,000, the note dated
November 4, 1988, in the amount of $385,000, and the note dated
May 24, 1989, in the amount of $132,390.10, with petitioner's
accounts receivable for units shipped to Northwest after October
11, 1988, making up the balance of $1,071,604. The parties agree
that all of the amounts due petitioner from Northwest on June 30,
1989, were worthless at that time.
Section 166(a) provides that there shall be allowed as a
deduction any debt which becomes wholly or partially worthless
within the taxable year. The taxpayer bears the burden of
proving entitlement to a claimed bad debt deduction. Rule
142(a); Crown v. Commissioner, 77 T.C. 582, 598 (1981).
We must evaluate whether there was a genuine intention to
create a debt, with a reasonable expectation of repayment, and
whether that intention comports with economic reality. Litton
Business Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973);
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