-9-
to Cirtex in 1986 and 1989 was intended to or did create a bona
fide debt Cirtex owed them. The promissory notes by themselves are
insufficient to prove the existence of a bona fide debt, especially
in view of Mrs. Yei's notation on one of the notes that it is to be
treated as capital and her testimony to a similar effect.
Moreover, we are mindful that Cirtex's corporate returns failed to
include any loans to shareholders in the appropriate space. We
conclude that the $45,000 constitutes a contribution by petitioners
to the capital of Cirtex and is not allowable to petitioners as a
bad debt deduction.
Issue 3. Dividend Income
Petitioners claim they are entitled to an $18,241 deduction in
1989 to offset a distribution from Cirtex that they contend was
erroneously reported as a dividend on their 1988 return.
Petitioners' reasoning with respect to this issue is difficult to
comprehend.
As best we can understand petitioners, they received an
$18,241 payment from Cirtex in 1988 and reported it as a dividend
on their return for that year. They now contend that Cirtex did
not have earnings and profits in 1988 and should not have paid a
dividend, even though Mr. Yei stated at the stockholders' meeting
that the company had profits of $80,000 that year.3 Petitioners
argue that the payment Cirtex made was funded by a capital
3 Petitioners claim that the $80,000 referred to at the
meeting was earnings before depreciation.
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