- 11 -
or execute any security agreements to collateralize the monetary
transfers.
Petitioners rely on Litwin v. United States, 983 F.2d 997
(10th Cir. 1993); however, Litwin decided whether a bona fide
debt was business or nonbusiness, not a question of whether a
bona fide debt existed. Our conclusion is consistent with the
analysis and holding in Jensen v. Commissioner, T.C. Memo. 1997-
491, affd. without published opinion 208 F.3d 226 (10th Cir.
2000). In Jensen, the Court held that the funds transferred by
the taxpayers to a closely held corporation were not bona fide
debts and not deductible as business bad debts under section
166(a). The Court of Appeals affirmed this Court’s holding in
Jensen, which applied the relevant factors to the facts of that
case as set forth in Calumet Indus., Inc. v. Commissioner, supra
at 285.
Based on the evidence, we conclude that petitioners’
monetary transfers to Auto Plaza did not constitute bona fide
loans, and, therefore, the transfers should be treated as capital
contributions. Petitioners may not take a deduction for bad debt
under section 166.
II. Self-Employment Tax
The next issue is whether the net profits and losses of
petitioners’ Schedule C businesses are attributable to
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
Last modified: May 25, 2011