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policy on Mr. Cerand held by FWC with $160,859 cash surrender
value. Petitioner recovered the cash surrender value and
reported the income as a debt reduction. No further attempts
were made to secure payment from the three defunct corporations.
In 1990, petitioner claimed a bad debt deduction for the
unpaid balances of ASC and CAI. In 1991, petitioner claimed a
bad debt deduction for FWC’s unpaid balance. In 1992, petitioner
claimed an NOL carryforward that was generated by the bad debt
claims. Respondent disallowed the following bad debt deductions
as ordinary losses, determining that they were capital losses.
1990 1991
Cerand Aviation, Inc. $174,760 ---
Aviation Services Corp. 43,331 ---
First World Co., Inc. --- $681,112
Total 218,091 681,112
Respondent asserts that the funds advanced by petitioner were
actually capital contributions to equity rather than debt. If
the bad debt deductions are not allowed as ordinary losses, then
the 1992 NOL carryforward is not allowable, and a previously
unavailable charitable deduction would be allowed.
OPINION
The sole adjustment under consideration involves the
question of whether petitioner is entitled, under section 166, to
business bad debt deductions for 1990 and 1991 due to the failure
of FWC, CAI, and ASC to repay advances made by petitioner. All
other adjustments depend on the outcome of this primary issue.
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