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section 166.1 The remainder of respondent’s deficiency
determinations resulted purely from computational adjustments
caused by the disallowance of petitioner’s ordinary loss
deduction.
Petitioner contends that, in form and substance, the
advances were loans that became worthless and deductible.
Respondent’s disallowance of the claimed bad-debt loss was
grounded on the same position that respondent maintains in this
litigation; i.e., petitioner’s advances to a related corporation,
Used Power Equipment, Inc. (UPE), were equity investments in UPE
and there was no intention for UPE to repay the advances. In
support of his position, respondent questions the validity,
credibility, and enforceability of petitioner’s promissory notes
and contends UPE was insolvent at the time the advances were
made. Respondent ultimately contends that the advances were
contributions to capital made to further petitioner’s sole
shareholder’s control of and investment in UPE, the loss of which
is a capital loss deductible only to the extent of capital gains
under section 1211.
1 Unless otherwise stated, all section references are to the
Internal Revenue Code in effect for the taxable year remaining in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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Last modified: May 25, 2011