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OPINION
A. Whether Amounts That AIM Paid to Petitioner Are Interest or
Dividends
Respondent contends that the payments in dispute, that is,
$16,599 for 1994, $21,460 for 1995, and $9,640 for 1996 (the
interest at issue), are not deductible as interest by AIM and are
constructive dividends to petitioner because there was no genuine
debt on which AIM could accrue interest. Petitioners contend
that these amounts are interest that AIM paid to petitioner and
not constructive dividends.
A taxpayer may deduct interest paid or accrued in a taxable
year on bona fide indebtedness. Sec. 163(a); Knetsch v. United
States, 364 U.S. 361 (1960); In re W. Tex. Mktg. Corp., 54 F.3d
1194 (5th Cir. 1995). Thus, we must decide whether the interest
at issue was paid or accrued on bona fide indebtedness. The
essence of bona fide indebtedness is an unconditional and legally
enforceable obligation for the payment of money. Linder v.
Commissioner, 68 T.C. 792, 796 (1977).
Petitioners contend that AIM accrued the interest at issue
on a loan from petitioner the proceeds of which AIM used to buy
the Whittington property from petitioner in early 1992.
Petitioners bear the burden of proof on this issue.3
3 Sec. 7491 applies to court proceedings arising in
connection with examinations commencing after July 22, 1998. The
revenue agent’s report is dated before July 22, 1998. Thus,
petitioners bear the burden of proof. Rule 142(a)(1).
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Last modified: May 25, 2011