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OPINION
Section 166(a) allows bad debt deductions for loans that
become worthless within a taxable year. Petitioner bears the
burden of proving that the amounts in question constituted loans
and that such loans became worthless in 1995, the year for which
the deduction is claimed.5 Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).
Under section 1.166-1(c), Income Tax Regs., bad debt
deductions are limited to bona fide loans that arise from genuine
debtor-creditor relationships and that are based on valid and
enforceable obligations to pay fixed or determinable sums of
money. A gift or a contribution to capital does not constitute a
valid loan for purposes of section 166. In re Uneco, Inc., 532
F.2d 1204, 1207 (8th Cir. 1976); sec. 1.166-1(c), Income Tax
Regs.
Necessary to the existence of a debtor-creditor relationship
is a finding that the taxpayer-creditor had a reasonable
expectation of repayment. Fisher v. Commissioner, 54 T.C. 905,
909-910 (1970).
Generally, courts analyze whether the requisite intent
existed to repay funds transferred by a taxpayer to another
5 Because the examination of petitioner’s individual Federal
income tax return for 1995 commenced before July 23, 1998,
sec. 7491 (relating to a possible shift of the burden of proof)
is inapplicable.
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