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Only a bona fide debt qualifies for the bad debt deduction.
Sec. 1.166-1(c), Income Tax Regs. A bona fide debt is one that
arises from a debtor-creditor relationship based upon a valid,
enforceable obligation to pay a fixed or determinable sum of
money. Id.; see also Estate of Van Anda v. Commissioner, 12 T.C.
1158, 1162 (1949), affd. 192 F.2d 391 (2d Cir. 1951). Factors
indicative of a bona fide debt include whether: (1) Evidence of
indebtedness exists; i.e., a note; (2) any security is requested;
(3) there has been a demand for repayment; (4) the parties’
records reflect the transaction as a loan; (5) any payments have
been made; and (6) any interest was charged.
A gift is not considered a debt for purposes of section 166.
Sec. 1.166-1(c), Income Tax Regs.; see also Calumet Indus., Inc.
v. Commissioner, 95 T.C. 257, 285 (1990). Purported “loans”
between family members are subject to rigid scrutiny and are
presumed to be gifts. Estate of Van Anda v. Commissioner, supra
at 1162. The presumption may be rebutted by proving that at the
time of the transaction there existed a real expectation of
repayment and an intent to enforce collection of the “debt”. See
id. (and cases cited thereat).
In a letter attached to petitioners’ joint return, Mr.
Sizelove stated that he lent $10,000 to help his son and his new
wife, he did not expect to recover this $10,000 “Gift” nor the
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Last modified: March 27, 2008