- 16 -
agreement between petitioner and the Hansens. The fact is that
petitioner canceled, or otherwise considered satisfied, any debt
owed to him by the corporation as part of his agreement with the
Hansens. It was characterized as contribution of capital in the
agreement, and there is no basis in fact for considering it
otherwise for Federal income tax purposes.
Furthermore, a shareholder's cancellation or forgiveness of
any debt owed to the shareholder from the shareholder's closely
held corporation is generally considered a contribution to the
corporation's capital, which is what occurred in this matter.
Lidgerwood Manufacturing Co. v. Commissioner, 229 F.2d 241 (2d
Cir. 1956), affg. 22 T.C. 1152 (1954); Bratton v. Commissioner,
217 F.2d 486 (6th Cir. 1954); Frantz v. Commissioner, 83 T.C. 162
(1984), affd. 784 F.2d 119 (2d Cir. 1986); sec. 1.61-12(a),
Income Tax Regs. But cf. Giblin v. Commissioner, 227 F.2d 692
(5th Cir. 1955), revg. T.C. Memo. 1954-186. A creditor's
voluntary forgiveness of a debt ordinarily does not provide
sufficient grounds for claiming a bad debt deduction. See W.D.
Haden Co. v. Commissioner, 165 F.2d 588 (5th Cir. 1948); Thompson
v. Commissioner, 6 T.C. 285 (1946), affd. 161 F.2d 185 (5th Cir.
1947). Accordingly, petitioners are not entitled to a bad debt
deduction for 1991 to the extent of the amount of debt evidenced
by the notes, or, as previously indicated, for the unexplained
balance of the $475,000.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011