- 7 -
substantiating income, the Commissioner is authorized to
reconstruct the taxpayer’s income by using any reasonable method
that clearly reflects income, including the use of bank deposit
records. Sec. 446(b); Clayton v. Commissioner, 102 T.C. 632, 645
(1994). Bank deposits are prima facie evidence of income. Id.
at 645. In calculating the taxpayer’s income, the Commissioner
must take into account any nontaxable source or deductible
expense of which he has knowledge. Id. at 645-646.
Indebtedness means “an unconditional and legally enforceable
obligation for the payment of money.” Autenreith v.
Commissioner, 115 F.2d 856, 858 (3d Cir. 1940), affg. 41 B.T.A.
319 (1940). The traditional indicia of bona fide indebtedness
include the existence of a note, an unconditional promise to
repay the principal, payment of interest, the existence of a
fixed repayment date or a fixed schedule for repayment, whether a
demand for repayment has been made, whether the borrower was
solvent at the time of the loan, and whether the parties’ records
reflect the transaction as a loan. Bergersen v. Commissioner,
109 F.3d 56, 60 (1st Cir. 1997), affg. T.C. Memo. 1995-424;
Noguchi v. Commissioner, 992 F.2d 226 (9th Cir. 1993), affg. T.C.
Memo. 1991-227; Goldstein v. Commissioner, T.C. Memo. 1980-273.
Because of the repayment obligation, loan proceeds do not qualify
as gross income to the taxpayer. Commissioner v. Tufts, 461 U.S.
300, 307 (1983). Interest is the payment for the use or
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 Next
Last modified: May 25, 2011