-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.
OPINION
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
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
Last modified: May 25, 2011