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contributions. Petitioners argue that they were loans and that they
are entitled to a $357,557 bad debt deduction for 1990 (which can
be carried back to 1989, the year at issue), calculated as follows:
HPD’s negative retained earnings ($1,357,557)
HPD’s capital stock 1,000,000
1990 bad debt 357,557
Generally, taxpayers may deduct the value of bona fide debts
owed to them that become worthless during the year. See sec.
166(a). Bona fide debts generally arise from valid debtor-creditor
relationships reflecting enforceable and unconditional obligations
to repay fixed sums of money. See sec. 1.166-1(c), Income Tax Regs.
For section 166 purposes, contributions to capital do not constitute
bona fide debts. See Kean v. Commissioner, 91 T.C. 575, 594 (1988).
The burden of establishing that the advances were loans rather than
capital contributions rests with the taxpayers. See Rule 142(a).
Courts look to the following nonexclusive factors to evaluate
the nature of transfers of funds to closely held corporations: (1)
The names given to the documents evidencing the indebtedness; (2)
the presence or absence of a maturity date; (3) the source of
repayments; (4) the right to enforce repayment of principal and
interest; (5) participation in management; (6) whether the taxpayers
5(...continued)
6213(a); Rule 13(a); Calumet Ind. v. Commissioner, 95 T.C. 257,
274 (1990) (citing Lone Manor Farms, Inc. v. Commissioner, 61
T.C. 436, 440 (1974), affd. without published opinion 510 F.2d
970 (3d Cir. 1975)). Thus, we have jurisdiction to determine
whether petitioners are entitled to a bad debt deduction in 1990
and are entitled to a net operating loss carryback to 1989.
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