Billie and Florence Lykins - Page 7

          net operating loss (NOL) carryover from 1989.  A substantial                
          portion of the carryover was attributable to the business bad               
          debt deduction claimed by petitioners on Form 1040X for 1989.               
               In 1990, petitioners claimed an NOL carryover stemming from            
          a business bad debt deduction reported on Form 1040X for 1989.              
          At issue in this case is the deductibility of the carryover                 
          claimed by petitioner.  The resolution of this issue turns on               
          whether the advance made by petitioner to Tag Coal on August 30,            
          1984, was a loan or a capital contribution, and, if the payment             
          was a loan, whether it was a business or a nonbusiness loan.  We            
          address these issues in turn.                                               
               1.   Capital contribution issue                                        
               Section 166 allows a deduction for any bad debt that becomes           
          worthless during the taxable year.  A bona fide debt 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.  This is in                
          contrast to a contribution to capital or equity investment, which           
          is not considered debt for purposes of section 166.  Kean v.                
          Commissioner, 91 T.C. 575, 594 (1988); sec. 1.166-1(c), Income              
          Tax Regs.                                                                   
               The existence of a bona fide debt is a factual inquiry that            
          turns on the facts and circumstances of the particular case, and            
          the taxpayer bears the burden of proving that a bona fide debt              

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