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had been living and working in California, the decision was made
for him to relocate to Hawaii to operate the business.
The corporation failed to thrive, and petitioner agreed to
forgo his formal monthly salary until the financial status of the
corporation improved. HIEI made $16,750 in "loan" payments to
petitioner, however, from January through May 1992 to cover his
living expenses while his salary was suspended. HIEI continued
to suffer financial hardship, and the corporation was terminated
on May 18, 1992. The corporation distributed an additional
$10,950 to petitioner between May 18 and September 7, 1992, the
day petitioner left Hawaii and returned to California.
Petitioners contend the payments from HIEI are tax-free loan
proceeds, and therefore they did not include the $27,700 in
income. Respondent reclassified the payments as income and
adjusted petitioners' taxable income to include the $27,700 as
money received as compensation for services.
Discussion
For petitioners to exclude the amounts received from HIEI as
loans, they must prove that at the time of each distribution,
petitioner unconditionally intended to repay the amounts
received, and HIEI unconditionally intended to require repayment.
Rule 142(a); Haag v. Commissioner, 88 T.C. 604, 616 (1987). If,
however, the parties actually intended the distributions to
compensate petitioner for his services, as respondent contends,
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