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year claimed; they are, moreover, subject to the same limitations
that apply to short-term capital losses. Sec. 166(d).
A deduction for a bad debt is limited to a bona fide debt.
Sec. 1.166-1(c), Income Tax Regs. A bona fide debt arises from a
debtor-creditor relationship based upon a valid and enforceable
obligation to pay a fixed or determinable sum of money. "A * * *
contribution to capital shall not be considered a debt for
purposes of section 166." Sec. 1.166-1(c), Income Tax Regs; see
In re Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir. 1976); Kean v.
Commissioner, 91 T.C. 575, 594 (1988).
Petitioners assert that the advance at issue constitutes a
business debt which became entirely worthless during 1989.
Consequently, they posit, they are entitled to fully deduct the
loss against ordinary income during that year. On the other
hand, respondent makes the following alternative arguments:
First, the advance does not constitute debt, but equity. Second,
if a valid debtor-creditor relationship did exist between
National and petitioner with respect to the amount in question,
then any loss is not deductible in 1989 because the debt was not
worthless in that year. Finally, respondent maintains that if
the debt was worthless in 1989, it was a nonbusiness rather than
a business bad debt, deductible only to the extent permitted
under section 166(d).
Characterization of an advance as either a loan (debt) or
capital contribution (equity) is a question of fact which must be
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