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Pursuant to extensions of time to file, petitioners’ 2000
joint tax return was due October 15, 2001. Petitioners filed
their joint tax return relating to 2000 on April 15, 2004, and
their joint tax return relating to 2001 on April 30, 2004.
Respondent disallowed petitioners’ business bad debt deductions
and determined additions to tax pursuant to section 6651(a)(1)
relating to 2000 and 2001.
Petitioners filed their petition with the Court on June 23,
2006, while residing in Montgomery, Texas.
OPINION
We must determine whether the expenses Mr. Bynum paid on
behalf of SEI are deductible business bad debts. A taxpayer is
entitled to deduct bona fide debts that become worthless within
the taxable year. Sec. 166(a)(1). Bona fide debts must arise
from debtor-creditor relationships based upon valid and
enforceable obligations to pay fixed or determinable amounts of
money. Sec. 1.166-1(c), Income Tax Regs. A contribution to
capital does not qualify as bona fide debt for purposes of
section 166. Calumet Indus., Inc. v. Commissioner, 95 T.C. 257,
284 (1990). The ultimate question is “‘whether the investment,
analyzed in terms of its economic reality, constitutes risk
capital entirely subject to the fortunes of the corporate venture
or represents a strict debtor-creditor relationship’”. See
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Last modified: March 27, 2008