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The financial statement that was part of Cap Corp.’s 1996 Federal
return reflects that Cap Corp.’s assets were just under $151,000
and its liabilities were well over $4 million. Cap Corp.’s 1996
return also reflected a net loss of $641,600 for Cap Corp. and
its subsidiaries. As of November 30, 1997, Cap Corp. owed
petitioner $1,859,135, consisting of the $500,000 outstanding
debt along with $1.257 million of additional advances made during
1997, plus interest. During 1997, petitioner made advances to
Cap Corp. of $55,000 on January 31, 1997; $50,000 on April 30,
1997; and $1.152 million on July 31, 1997.
Cap Corp. (through Koehler) issued petitioner a December 1,
1996, promissory note to cover the above debt. Among other
things, Cap Corp. promised to pay on or before November 30, 1997,
all outstanding principal and 10 percent interest to petitioner.
E. Petitioner’s 1997 Ordinary Loss and Bad Debt Deduction;
Petitioner’s 1998 AeroCentury Stock Transaction
On its 1997 return, petitioner claimed a $1,859,135 bad debt
deduction consisting of: (1) The $500,000 Cap Corp. debt not
assumed by CKH in the debt conversion transaction; (2) the
$1,257,000 of advances to Cap Corp. during 1997; and (3) $102,135
of interest owed petitioner by Cap Corp. Petitioner did not
claim a deduction with respect to CKH’s $2.259 million assumption
of Cap Corp.’s debt or the conversion of the Cap Corp. debt into
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