- 11 -
$1,352,433 of unrecoverable debt was attributable to its advances
to UPE. Included within petitioner’s claimed deduction was the
amount of $111,984.67, which represented the balance on UPE’s
loan from Grocers that petitioner had paid off. The deduction
was the basis for a claimed net operating loss that was carried
back to petitioner’s 1991 and 1992 tax years.
OPINION
The sole issue we consider is whether petitioner is entitled
to a business bad debt deduction for its 1994 tax year.3 Bad
debts that become worthless within the taxable year are
deductible by a corporate taxpayer as ordinary losses under
section 166(a). The right to a deduction is limited to genuine
debt, and specifically, contributions to capital 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); sec.
1.166-1(c), Income Tax Regs. Before a bad debt deduction may be
taken under section 166(a), a taxpayer must establish the
3 At trial, near the conclusion of petitioner's case-in-
chief, petitioner’s counsel stated that petitioner would not be
relying on the alternative theory that petitioner was entitled to
interest expense deductions under sec. 163. As a result,
respondent limited his cross-examination of at least one of
petitioner's witnesses and rested without offering any witnesses
of his own. Thereafter, petitioner resurrected and argued the
sec. 163 issue on brief in spite of its concession at trial.
Such behavior is impermissible and prejudicial to respondent.
Accordingly, petitioner is precluded from urging its alternative
theory under sec. 163. See Seligman v. Commissioner, 84 T.C.
191, 198-199 (1985).
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011