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Amount of
Dates of advances advances Date & amount of note
2/21/92 to 9/18/92 $49,000 10/1/92 $36,513.92
10/5/92 to 6/4/93 16,500 10/1/93 6,500.00
10/5/93 to 9/15/94 12,000 10/3/94 3,872.21
10/2/94 to 6/9/95 42,200 10/2/95 43,553.55
Total 119,700 90,439.68
J&J did not require any personal guaranties from the Shedds on
the advances to TLC. No repayment schedule was established, and
J&J made no demand of TLC for payment of the principal or
interest on the notes.
TLC was dissolved prior to April 1995, and it filed a
“Notification of Dissolution or Surrender” with the State of Ohio
Department of Taxation indicating that it ceased or would cease
operations on April 1, 1995. On its 1995 Federal income tax
return, TLC reported $90,440 income due from the forgiveness of
the above-described debt. J&J claimed the amount as a bad debt
deduction and respondent disallowed the deduction.
OPINION
Respondent contends that J&J’s advances to TLC, a
corporation wholly owned by J&J’s shareholders, constituted
equity investments in those companies. As such, TLC’s subsequent
failure resulted in capital as opposed to ordinary losses for
J&J. Respondent also contends that the funds advanced to TLC by
J&J were constructive dividends. Petitioners counter that the
advances constituted valid debt between J&J and TLC and that
TLC's inability to repay the debt resulted in worthlessness and
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Last modified: May 25, 2011