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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