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prepared. We disagree. AIM was licensed to bid on larger
contracts because it did not disclose the alleged loan from
petitioner to AIM in the financial statements AIM submitted to
the Mississippi and Alabama licensing boards. Petitioner
represented to Citizens National Bank that AIM had not paid
anything to own the Whittington property. Petitioner’s
representation enhanced AIM’s ability to borrow funds from
Citizens National Bank. We do not ignore the balance sheets and
statements that conflict with the note.
We conclude that petitioner and AIM did not create a bona
fide debt. Thus, AIM’s payments to petitioner of $16,599 in
1994, $21,460 in 1995, and $9,640 in 1996 are constructive
dividends to petitioner and not deductible by AIM as interest.
B. Whether AIM May Deduct as a Bad Debt $14,900 It Paid to
Scott
1. Whether the $14,900 That AIM Paid to Scott Was a Loan
AIM deducted as a bad debt in 1996 the $14,900 it paid to
Scott. Respondent points out that there was no promissory note
or provision for repayment and contends that the $14,900 was not
a loan. We disagree.
A taxpayer may deduct a debt that becomes worthless in the
taxable year. Sec. 166(a)(1); sec. 1.166-1(c), Income Tax Regs.
Petitioner credibly testified that the $14,900 AIM paid to Scott
was a loan. The notations on the checks and some of the entries
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