In a recent tax case; claiming a large bad debt deductions lead an investor to some tax woes.
The investor had his S corporation advance funds to small companies in return for financial control and a minority equity interest.
Later, the S corporation claimed a $10-million bad debt write-off, which flowed through to the investor and offset all of his taxable income.
The Service audited his return and nixed the loss. Reclassifying the advances as equity contributions and not loans. Since there were no written notes or fixed repayment date, interest wasn’t charged, and the S firm financed the companies even after the year in which the bad debt deduction was taken.
Sensenig, 3rd Cir.