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return, they reported an “other” loss on line 15 in the amount of
$234,457. Petitioners attached to their 1992 return Form 4797,
Sales of Business Property, which listed the $234,457 loss as a
business bad debt. In notes attached to their 1992 return,
petitioners stated, in relevant part:
THE FOLLOWING BUSINESS BAD DEBT HAS BEEN WRITTEN OFF IN
THE CURRENT YEAR:
NOTE
AMOUNT DUE
NOTE PAYABLE TO JANE HESS FROM
HESS & HESS CONSTRUCTION, INC. $234,457 ON DEMAND
THE DEBTOR IS A CORPORATION WHOLLY-OWNED BY THE
TAXPAYERS, WHICH IS NO LONGER SOLVENT. THE DEBT WAS
DEEMED WORTHLESS WHEN THE CORPORATION NO LONGER COULD
CONTINUE TO MEET ITS OBLIGATIONS AS THEY BECAME DUE.
On or about April 15, 1996, petitioners jointly filed their
1995 Federal income tax return. On April 17, 1996, petitioners
jointly filed their 1993 and 1994 Federal income tax returns.
Petitioners claimed NOL carryover deductions in the amounts of
$204,146, $167,526, and $127,943 in the taxable years 1993, 1994,
and 1995, respectively.
We must decide whether petitioners are entitled to deduct
the NOL carryovers in the taxable years in issue. Resolution of
this issue depends upon the validity of the bad debt deduction
claimed by petitioners in 1992. See sec. 6214(b).
Respondent argues that the money advanced by Mrs. Hess to
Hess Inc. in 1992 was not a loan and that petitioners were not
entitled to the NOL carryover deductions in the taxable years in
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