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Bad Debt Deductions-–Weinstein and Attieh Bros.
Petitioner claimed bad debt deductions for the amounts lent
to Ms. Weinstein and Attieh Bros. In the notice of deficiency,
respondent disallowed both deductions. Petitioner has the burden
of proof. Rule 142(a).18 We sustain respondent’s determination
on the ground that petitioner has not carried his burden of
proving that the debts became worthless during the year in issue.
The initial step in establishing entitlement to a bad debt
deduction is proof of a bona fide debtor-creditor relationship
that obligates the debtor to pay a fixed or determinable amount.
Calumet Indus., Inc. v. Commissioner, 95 T.C. 257, 284 (1990);
sec. 1.166-1(c), Income Tax Regs. A gift or contribution to
capital is not a debt. Calumet Indus., Inc. v. Commissioner,
supra; sec. 1.166-1(c), Income Tax Regs. We find that the loans
at issue were genuine debts. In both cases, loan agreements
providing for interest payments evidenced the existence of the
debts. See Lerma v. Commissioner, T.C. Memo. 1995-586; sec.
1.166-1(c), Income Tax Regs. Moreover, Ms. Weinstein’s business
and Attieh Bros. were going concerns at the time the loans were
made. See Lerma v. Commissioner, supra. Finally, the
communications between both Ms. Weinstein and the Attiehs and
18 Sec. 7491 does not apply to this case because the
examination commenced prior to July 22, 1998, the effective date
of that section. See Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, sec. 3001(c)(1), 112 Stat.
726.
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