-29-
B. Petitioners’ Claim to a Bad Debt Deduction
Petitioners bear the burden of proving that the transfers
are debt.6 See Rule 142(a)(1); Roth Steel Tube Co. v.
Commissioner, 800 F.2d 625, 630 (6th Cir. 1986), affg. T.C. Memo.
1985-58; Smith v. Commissioner, 370 F.2d 178, 180 (6th Cir.
1966), affg. T.C. Memo. 1964-278. Debt for Federal income tax
purposes connotes an existing, unconditional, and legally
enforceable obligation to repay. See Roth Steel Tube Co. v.
Commissioner, supra at 630; First Natl. Co. v. Commissioner,
289 F.2d 861, 864-865 (6th Cir. 1961), revg. and remanding
32 T.C. 798 (1959); Burrill v. Commissioner, 93 T.C. 643, 666
(1989); see also AMW Invs., Inc. v. Commissioner, T.C. Memo.
1996-235. Transfers between related parties are examined with
special scrutiny. Cf. Roth Steel Tube Co. v. Commissioner, supra
at 630. A transfer’s economic substance prevails over its form,
see Smith v. Commissioner, supra at 180; Byerlite Corp. v.
Williams, 286 F.2d 285, 291 (6th Cir. 1960), and a finding of
economic substance turns on whether the transfer would have
followed the same form had it been between the transferee and an
6 Petitioners have not raised the issue of sec. 7491(a),
which shifts the burden of proof to the Commissioner in certain
situations, and we conclude that sec. 7491(a) does not apply.
In the case of a corporation such as each petitioner, sec.
7491(a)(2) limits the shifting of the burden of proof to
situations where, among other things, the corporation shows that
upon filing its petition in this Court, its net worth was no more
than $7 million. See also 28 U.S.C. sec. 2412(d)(2)(B) (2000).
Neither petitioner has made such a showing.
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