- 6 -
entitled J&J to an ordinary loss deduction under section 166.
Because of petitioners’ characterization of the advances as bona
fide loans, they contend that the advancing of funds was not a
constructive dividend.
Bad Debt
Bad debts which become worthless within the taxable year are
deductible by a corporate taxpayer as ordinary losses under
section 166(a)(1). The right to a deduction is limited to
genuine debt, and capital contributions are not considered debt
for the purposes of section 166(a)(1). See Raymond v. United
States, 511 F.2d 185, 189 (6th Cir. 1975). Capital
contributions, on the other hand, may result in a capital loss
for a shareholder if the stock becomes worthless. See sec.
165(g)(1).
The determination of whether advances to a corporation are
loans or capital contributions depends on whether there is an
intention to create an unconditional obligation to repay the
advances. See Raymond v. Commissioner, supra at 190. Advances
between related corporations are subject to particular scrutiny
because the relationship more readily facilitates fictionalized
debt. See In re Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir.
1976). Petitioners must show that the advances were loans rather
than capital contributions as determined by respondent. See Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933).
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Next
Last modified: May 25, 2011