Checks Received from a Family Member Were Bona Fide Loans and Not Compensation for Services (Kaider, TCM)

A nephew who performed computer services for his uncle was not liable for an income tax deficiency as a result of his receiving four personal checks from his uncle because the checks were bona fide loans, rather than compensation for services. Each of the checks was determined to be a bona fide loan because: (1) there was a reasonable expectation that he would be able to repay the amount of the checks received; (2) the loan agreements that were executed for each check showed an intent to create a debtor-creditor relationship; (3) provisions were included in the loan agreements for a fixed repayment date and an annual interest rate; (4) there was a notation on each check indicating it was a loan and the checks were drawn on the uncle’s individual checking account, not his business account; and (5) the amount of the checks was not deducted as compensation paid by the uncle’s business. Furthermore, there was no evidence that the loans were disguised as compensation for few services the nephew performed.

T.J. Kaider, TC Memo. 2011-174, Dec. 58,708(M)

Other References:

Code Sec. 61

CCH Reference – 2011FED ¶5504.2856

CCH Reference – 2011FED ¶5504.286

CCH Reference – 2011FED ¶5504.2873

CCH Reference – 2011FED ¶5504.2876

Tax Research Consultant

CCH Reference – TRC INDIV: 33,102.20


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