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OPINION
I. Transferred Funds
A. Overview
Petitioners argue primarily that HEI’s transfers to ALSL
created debt which became uncollectible in HEI’s 1997 taxable
year, thus for that year entitling HEI to a bad debt deduction
under section 166.5 Alternatively, petitioners argue, the
transfers were HEI’s contribution to the capital of ALSL, which
entitled HEI for its 1997 taxable year to deduct an ordinary loss
resulting from a loss of that capital. Respondent argues that
the transfers were not debt. Respondent also argues that the
transfers were not capital contributions made by HEI, noting that
ALSL was owned not by HEI but primarily by the individuals who
controlled HEI.
We agree with respondent that HEI is not entitled to either
of its desired deductions with respect to the transfers. We
conclude that the transfers were not deductible for HEI’s 1997
taxable year as debt nor as contributions made by HEI to the
capital of ALSL.
5 Sec. 166(a)(1) provides that a taxpayer may deduct as an
ordinary loss a debt which becomes worthless during the taxable
year.
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