Gerald L. and Erma L. Dunnegan - Page 11

                                       - 11 -                                         
          or execute any security agreements to collateralize the monetary            
               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