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Petitioner claimed on his 1990, 1991, and 1992 returns
deductions relating to his 1990, 1991, and 1992 advances to
Speedmart. He reported bad debt expenses of $24,000, $34,103,
and $28,000 on his Schedules C (Profit or Loss From Business
(Sole Proprietorship)) for 1990, 1991, and 1992, respectively.
Petitioner also claimed, for 1990, 1991, and 1992, unreimbursed
partnership expenses of $500, $500, and $1,000, respectively.
On February 15, 1995, respondent issued a notice of
deficiency disallowing the claimed deductions. By amendment to
her answer, respondent asserted a negligence penalty for each
year.
OPINION
I. Bad Debt Deductions
Section 166(a) allows a deduction for debts that become
worthless during the taxable year. By contrast, capital
contributions are not deductible under section 166(a). See,
e.g., Calumet Indus., Inc. v. Commissioner, 95 T.C. 257, 284
(1990). For purposes of section 166(a), the term "debt" includes
only bona fide debts. Sec. 1.166-1(c), Income Tax Regs.
According to the regulation, "A bona fide debt is a debt which
arises from a debtor-creditor relationship based upon a valid and
enforceable obligation to pay a fixed or determinable sum of
money." Id. Consequently, we must determine whether
petitioner's advances to Speedmart were made in exchange for bona
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