Thomas M. and Christine A. Fries - Page 1

                                 T.C. Memo. 1997-93                                   

                               UNITED STATES TAX COURT                                

                  THOMAS M. AND CHRISTINE A. FRIES, Petitioners v.                    
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 23232-93.                Filed February 24, 1997.           

                    Corp. was organized in 1987 with $900 in capital                  
               contributions, of which amount H contributed $300.                     
               Shortly thereafter, H advanced an additional $74,700 to                
               Corp. and received in return a fully enforceable,                      
               unsecured note with a set monthly repayment schedule.                  
               No payment of principal or interest was ever made on                   
               the note by Corp.  In 1989, Ps deducted the entire                     
               amount of the advance as a business bad debt under sec.                
               166, I.R.C.  R disallowed the deduction completely,                    
               determining that the advance was a capital contribution                
               and not a loan.  On the facts, Held:  The advance H                    
               made to Corp. constituted a contribution to capital                    
               and, therefore, Ps are not entitled to claim a bad debt                
               deduction under sec. 166, I.R.C.  Held, further, R's                   
               determination that Ps are liable for the accuracy-                     
               related penalty under sec. 6662(a), I.R.C., for a                      
               substantial understatement of tax is sustained.                        

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