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of which $169,331 represented a carryover of the 1993 net
operating loss.
In the notice of deficiency for taxable year 1993,
respondent disallowed petitioners’ claimed bad debt deduction
“because it has not been established that any amount of bad debts
existed in fact and in law.” Similarly, for taxable year 1995,
respondent disallowed the $169,331 claimed net operating loss
carryover “because it has been determined that a net operating
loss did not exist in the year that caused the carryforward.”
OPINION
A. The Parties’ Contentions
Petitioners argue that the advances to Gandy’s were loans
that petitioner made in the course of his lending business, that
the loans became worthless in 1993, and that they are properly
deductible either under section 166 as business bad debts or
under section 165 as ordinary losses incurred in a trade or
business.
Respondent agrees that petitioner was in the business of
lending money but argues that the advances in issue represent
contributions to Gandy’s capital rather than debt. At trial and
on brief, respondent concedes that petitioners are entitled to
deduct the losses under section 165 but only as long-term capital
losses, pursuant to section 165(f).
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