- 28 -
xii. Conclusion
Many of the factors favor classifying the advances as debt,
and none of the factors supports a classification as equity. We
conclude that the advances are debt.
2. Worthlessness
Respondent disallowed petitioner's deduction for a $5
million bad debt, stating in the notice of deficiency that
petitioner had not established that the deduction qualified under
section 162 or section 165. Respondent argues in her brief that
the Court should sustain her disallowance because petitioner has
not proven that: (1) Kenilworth became insolvent during the year
of the deduction or (2) petitioner was without a reasonable
prospect of recovery during that year. Petitioner argues that it
should be allowed the $5 million deduction primarily because it
guaranteed the debt of Kenilworth, and it (petitioner) was forced
to transfer these funds to the brokerage firms to satisfy this
guarantee.
Taxpayers may currently deduct the amount of any debt that
becomes worthless during a given year. See sec. 166. A loss
sustained by a guarantor unable to recover from the debtor is a
loss from a bad debt. Putnam v. Commissioner, 352 U.S. 82
(1956); Black Gold Energy Corp. v. Commissioner, 99 T.C. 482, 486
(1992), affd. without published opinion 33 F.3d 62 (10th Cir.
1994); Martin v. Commissioner, 52 T.C. 140, 144 (1969), affd.
424 F.2d 1368 (9th Cir. 1970); see also Foretravel, Inc. v.
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011