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petitioners at trial or on brief are deemed conceded. The issues
that petitioners addressed at trial or in their brief are
considered below. Petitioners failed to file a reply brief
ordered by the Court.
I. Business Bad Debt
The first issue is whether the monetary transfers that
petitioners made to Auto Plaza are capital contributions or are
bona fide debts that are deductible as business bad debts under
section 166 when they became worthless.
Generally, taxpayers are allowed deductions for bona fide
debts owed to them that become worthless during a year. Sec.
166(a). Bona fide debts generally arise from valid
debtor-creditor relationships reflecting enforceable and
unconditional obligations to repay fixed sums of money. Sec.
1.166-1(c), Income Tax Regs. For purposes of section 166,
contributions to capital and equity investments in corporations
do not constitute or qualify as bona fide debts. Kean v.
Commissioner, 91 T.C. 575, 594 (1988).
The question of whether transfers of funds to closely held
corporations constitute debt or equity in the hands of the
recipient corporations must be decided on the basis of all of the
relevant facts and circumstances. Dixie Dairies Corp. v.
Commissioner, 74 T.C. 476, 493 (1980). Courts have established a
list of nonexclusive factors to consider when evaluating the
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