- 49 - Respondent argues that these transactions were not bona fide loans, but unreported taxable gifts. The estate does not address the "loans" to Mr. Skauronski and Mr. Pasko. The estate contends that the payments to Ms. Wong were loans, or, in the alternative, consideration for services rendered. We agree with respondent. An individual may claim a short-term capital loss for a nonbusiness bad debt that becomes worthless during the taxable year. Sec. 166(d). In order to do so, however, the debt must be bona fide. A bona fide debt arises "from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money". Sec. 1.166-1(c), Income Tax Regs. A bona fide debt does not include an advance to a friend solely for reasons other than to make a profit. Case law establishes a two-part test for determining whether a transfer of money qualifies as debt. First, repayment of the purported debt cannot be contingent upon a future event. Second, the transfer must be made with a reasonable expectation, belief, and intention that it will be repaid. See Zimmerman v. United States, 318 F.2d 611 (9th Cir. 1963). Whether a transfer is made with the requisite expectation, belief, and intent is factual, John Kelley Co. v. Commissioner, 326 U.S. 521 (1946), and the following nonexclusive factors, none of which is controlling by itself, are relevant to this determination: (1) Whether a notePage: Previous 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 Next
Last modified: May 25, 2011