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the existence of a valid debtor-creditor relationship between UI
and petitioners with regard to the 1986 and 1987 funds
transferred to UI.
The 1989 promissory note was subordinated to the loans of
UI’s creditors. During the years in issue, UI did repay
creditors, such as Wilcox and the City of Orem, in preference to
making payment on its alleged debt obligation to petitioners.
See Roth Steel Tube Co. v. Commissioner, supra at 631-632; United
States v. Henderson, 375 F.2d 36, 40 (5th Cir. 1967).
Petitioner’s stated intent and the entries in UI's books
with regard to the 1986 and 1987 transfers of funds from
petitioners are not consistent with the weight of the objective
evidence in this case.
The record provides incomplete information with regard to
UI’s debt-equity ratio for the years in issue, and we give this
factor no weight in our analysis.
The evidence does not support a conclusion that the $42,000
in funds that UI distributed to petitioner in 1987 constituted
repayments of principal or interest.
Based on the evidence and considering petitioners’ burden of
proof, we conclude that petitioners’ 1986 and 1987 transfers to
UI did not constitute bona fide loans, and therefore, that the
transfers should be treated as capital contributions rather than
loans. For 1990, petitioners may not deduct the claimed $184,874
as a bad debt under section 166.
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