-244-
B. Bona Fide Indebtedness Issue
Respondent makes an alternative argument that the $79
million receivable did not arise as part of a bona fide debtor-
creditor relationship. Respondent cites MGM Group Holdings’
assumption of New MGM’s $79 million in indebtedness as a
condition to the sale of New MGM to Kirk Kerkorian. Respondent
contends that since the $79 million receivable did not represent
a bona fide debt, it could not have been contributed to SMP on
December 11, 1996, and SMP could not have obtained basis in the
receivable. Petitioner contends that the $79 million receivable
was bona fide debt of SMHC and arose from a “real loan”
obligation in connection with the 1993 restructuring.
Generally, to be recognized for Federal tax purposes,
indebtedness must be bona fide and must arise from a valid
debtor-creditor relationship. See Knetsch v. United States, 364
U.S. at 365-367; Maxwell v. Commissioner, 3 F.3d 591, 595-597 (2d
Cir. 1993), affg. 98 T.C. 594 (1992). The determinative question
is: “Was there a genuine intention to create a debt, with a
reasonable expectation of repayment, and did that intention
comport with the economic reality of creating a debtor-creditor
relationship?” Litton Bus. Sys., Inc. v. Commissioner, 61 T.C.
367, 377 (1973). In determining whether indebtedness is bona
171(...continued)
would not give rise to any substituted basis under the
partnership basis rules (e.g., sec. 723).
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