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"Mark Mann's repayment of the advances was contingent upon his
future earnings", and the repayments Mark Mann made in fact came
primarily from the salary and bonuses he earned working for
petitioner.
For these reasons, respondent argues that, even if
petitioner and Mark Mann intended to create a debtor-creditor
relationship, Mark Mann's repayment of the advances was too
"contingent" for the advances to constitute a valid and
enforceable bona fide debt obligation. In considering this
argument, it is useful to distinguish contingencies that affect a
borrower's legal obligation to repay (such as conditions
precedent, which must be satisfied before the borrower is
contractually obligated to repay), from contingencies that affect
the borrower's financial ability to repay.
If a borrower's legal obligation to repay is subject to a
contingency, no valid and enforceable debt exists--and no bad
debt deduction is therefore allowable--if the contingency has not
occurred. See Clark v. Commissioner, supra (borrower promised to
repay only if she received sufficient dividends on certain stock;
held, no debt existed--and no bad debt deduction was allowable--
where no dividends were ever paid). Where a borrower's promise
and obligation to repay are unconditional, however, a valid and
enforceable debt may exist--and a bad debt deduction may be
proper--even if the borrower's financial ability to repay is
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