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Transfers to closely held corporations by controlling
shareholders are subject to heightened scrutiny, and labels
attached to such transfers by the controlling shareholders
through bookkeeping entries or testimony have limited
significance unless these labels are supported by objective
evidence. Fin Hay Realty Co. v. United States, supra at 697;
Dixie Dairies Corp. v. Commissioner, supra at 495.
An expectation of repayment solely from corporate earnings
generally is not indicative of a bona fide loan. Roth Steel Tube
Co. v. Commissioner, 800 F.2d 625, 631-632 (6th Cir. 1986), affg.
T.C. Memo. 1985-58.
Petitioners argue that all of the funds that petitioners
transferred to UI during 1986 and 1987 constituted loans and that
the 1989 promissory note reflected a bona fide business loan made
by petitioners that became worthless in 1990 and that therefore
qualifies for a business bad debt deduction.
Respondent argues primarily that each of petitioners’
transfers of funds to UI should be treated as a contribution to
the capital of UI, and therefore, that petitioners should not be
allowed the claimed $184,874 bad debt deduction under section
166. Alternatively, respondent argues that if any portion of
petitioners’ transfers of funds to UI constituted bona fide loans
for the years in issue, that portion should be treated as
nonbusiness loans that did not become completely worthless in
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Last modified: May 25, 2011