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or execute any security agreements to collaterize the advances.
According to petitioners, security for the alleged loans was “not
needed especially when petitioners are the sole owners and the CEO
of HPD with full control of its finances”.
In sum, on the basis of the facts and circumstances, we
conclude that petitioners did not intend to create bona fide loans
at the time the advances were made. Rather, in an attempt to
salvage HPD (as petitioner admitted at trial), petitioners advanced
funds to the corporation when necessary, so far as the evidence
shows, without the intention of being creditors. We hold that the
advances were capital contributions. Consequently, petitioners are
not entitled to a bad debt deduction pursuant to section 166. In
view of this holding, we need not decide (a) whether the advances
were business or nonbusiness bad debts and/or (b) whether the
advances became worthless in 1990.
Issue 4. Section 6662(a) Accuracy-Related Penalty
The final issue is whether petitioners are liable for the
section 6662(a) accuracy-related penalty. Section 6662 imposes an
accuracy-related penalty equal to 20 percent of any portion of an
understatement attributable to negligence or disregard of rules or
regulations or substantial understatement of tax. “Negligence”
means any failure to make a reasonable attempt to comply with the
provisions of the Internal Revenue Code, and “disregard” means any
careless, reckless, or intentional disregard. Sec. 6662(c).
Additionally, no penalty is imposed with respect to any portion of
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