-8-
were made because the company had cash flow problems. The payments
made in 1986 are evidenced by 4 demand notes; the payment made in
1989 is not evidenced by any note. Mrs. Yei's notation on one of
the 1986 promissory notes states, "treat it [the amount of the
payment] as paid in capital". Mrs. Yei testified that the payments
were treated as capital, at the recommendation of the corporation's
outside accountant, in order to make Cirtex's financial statements
"look better".
Cirtex treated the $84,000 paid to petitioners as salaries,
and reported such amount on Forms 940 and 941 as business expenses.
We find that the $84,000 petitioners received from Cirtex was
wage income. Indeed, the wage amount in 1989 was in line with the
amount reported in 1988 ($83,539).
We now turn to petitioners' alternative position. Section
166 permits as a deduction any debt that becomes worthless within
the taxable year. Only a bona fide debt can be deducted. A bona
fide debt is a debt that arises from a debtor-creditor relationship
based upon a valid and enforceable obligation to pay a fixed or
determinable sum of money. A contribution of capital is not
considered a debt for section 166 purposes. Sec. 1.166-1(c),
Income Tax Regs. Whether a transfer of money creates a bona fide
debt depends upon the intent of the parties involved in the
transaction. Delta Plastics Corp. v. Commissioner, 54 T.C. 1287,
1291 (1970).
Petitioners failed to prove that the $45,000 they transferred
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