- 30 -
based upon a valid and enforceable obligation to pay a fixed or
determinable sum of money. See sec. 1.166-1(c), Income Tax Regs.
A taxpayer must establish the validity of a debt before any
portion of it may be deducted under section 166. See American
Offshore, Inc. v. Commissioner, 97 T.C. 579, 602 (1991); sec.
1.166-1(c), Income Tax Regs.
With respect to the money paid to the Hewitts under the
earnest money contract,14 petitioners breached the earnest money
contract with the Hewitts, and petitioners were, therefore, not
entitled to a recovery of those moneys under the terms of the
contract. Those moneys were forfeited as liquidated damages to
the Hewitts when petitioners breached the contract. Moreover,
the Hewitts were not unjustly enriched by the payments under the
contract because petitioners had a contractual duty to pay those
amounts, and there was a possibility those moneys would be
forfeited if petitioners breached the contract. Therefore, the
Court finds that those moneys clearly did not constitute a bona
fide debt owed by the Hewitts to petitioners.
With respect to the monthly payments made by petitioners to
Mrs. Hewitt and Lomas Mortgage after the expiration of the
earnest money contract, petitioners have not shown that they
constituted more than fair rental value payments for petitioners’
14 This includes the $4,100 in earnest money payments as
well as the $250 portions of the $1,000 monthly payments made
prior to the expiration of the earnest money contract, which were
to have been applied toward the purchase price.
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011