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Memo. 1995-267, Slater v. Commissioner, T.C. Memo. 1989-35, and
Atkinson v. Commissioner, T.C. Memo. 1984-378. In those cases,
the taxpayers were shareholders of closely held corporations.
They had signed guarantees on behalf of their corporations, upon
which they had to make payment when their businesses failed. In
each case, we found that the payments were the equivalent of
contributions to capital.
In sum, the facts surrounding Glenn Peterson's guarantee of
Dutchess' debt do not show that he intended to create a bona fide
debtor-creditor relationship between himself and Dutchess, and do
not reflect a reasonable expectation of repayment on his part,
but rather show that the payment on the guarantee was a
contribution to capital. Calumet Industries, Inc. v.
Commissioner, supra at 286. Thus, we sustain the disallowance by
respondent of petitioners' bad debt deduction in the amount of
$250,000. Petitioners are entitled, as respondent concedes, to a
capital loss in the amount of $205,522.72, subject to the
limitations of section 1211.
Our conclusion moots the question whether, had we found that
the guarantee and its payment gave rise to a bona fide
indebtedness and did not constitute a contribution to capital,
the bad debt would have been a business rather than a nonbusiness
bad debt. We append the following comments on that issue only
because petitioners have devoted so much attention to it.
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