- 13 -
section 165. Respondent's counsel, during her opening statement
at trial, conceded that a loss occurred, but she disputed:
(1) The amount of the loss, (2) that the advances were loans, as
opposed to contributions to Kenilworth's capital, and (3) that
Kenilworth intended to repay the advances, to the extent they
were loans. On brief, respondent primarily argues that the
advances were not loans because they bear none of the formal
indicia of debt. According to respondent, petitioner and
Kenilworth classified the advances as loans when they prepared
their income tax returns because they wanted to transfer losses
between themselves. If the advances were loans, respondent
alternatively argues, the loans were not worthless because
Kenilworth was solvent at the time of forgiveness.
1. Debt or Contribution to Capital
A taxpayer may deduct any debt that becomes wholly or
partially worthless during the taxable year. Sec. 166(a). The
term “debt” connotes a bona fide debtor-creditor relationship
that obligates the debtor to pay the creditor a fixed or
determinable sum of money. Sec. 1.166-1(c), Income Tax Regs.
Capital contributions are not debt. Capital contributions are
equity. Roth Steel Tube Co. v. Commissioner, 800 F.2d 625, 629
(6th Cir. 1986), affg. T.C. Memo. 1985-58; Calumet Indus., Inc. &
Subs. v. Commissioner, 95 T.C. 257, 284 (1990).
A taxpayer must establish the validity of a debt before any
portion of it may be deducted under section 166. American
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011