Court denies bad-debt and NOL deductions after taxpayer fails to prove loans or timing

Fussell v. Commissioner, T.C. Memo. 2025-131, No. 9700-23. BL 454169.

The Tax Court upheld a 2018 deficiency and penalties after finding that the taxpayer never proved his claimed loans were real debt or that any loss could be carried back to 2018 through an NOL.

Holding

The court sustained the IRS deficiency and additions to tax. The taxpayer failed to establish a bona fide debt under §166, failed to prove worthlessness in any year, and failed to show any NOL available for 2018.

Why It Matters

• Advances to a closely held corporation must look like real loans, not equity.

• Processing of an amended return does not bind the IRS for other years.

• NOLs must be absorbed in the required carryback years before any carryforward.

• Failing to file while disputing prior years does not excuse penalties.

Timeline

• 2004–2005: Taxpayer acquires Velidom stock and advances funds.

• 2008–2015: Company operations end. Dissolution notices issued.

• 2015: Taxpayer files amended returns claiming bad-debt losses.

• 2017–2018: Prior Tax Court case resolves 2013–2014 with no changes.

• 2022–2023: IRS prepares SFR for 2018 and issues SNOD.

• 2025: Tax Court decides the case.

Key Facts

• The taxpayer advanced funds to a closely held software company he controlled.

• No promissory notes, repayment terms, interest, or repayment history were produced.

• The taxpayer did not file a 2018 return. The IRS prepared a substitute for the return.

• The IRS determined unreported nonemployee compensation for 2018, which the taxpayer conceded.

Statutory or Regulatory Framework

• §166 allows a deduction for bona fide debts that become worthless in the year.

• Bona fide debt requires a valid debtor-creditor relationship with enforceable repayment.

• §172 governs NOL carrybacks and carryovers and requires absorption in prior years.

• §§6651(a)(1), 6651(a)(2), and 6654 impose additions to tax for failure to file, pay, and make estimated payments.

Arguments

Taxpayer argued:

• Advances to the corporation were loans that later became worthless.

• Unused bad-debt losses produced an NOL that could offset 2018 income.

• IRS acceptance of a prior amended return showed agreement.

Government argued:

• The advances were equity or gifts, not bona fide debt.

• No evidence of worthlessness was shown in any specific year.

• Even if a loss existed, NOL rules would fully absorb it before 2018.

• Penalties applied due to failure to file and pay.

Court’s Reasoning

• The taxpayer failed to prove a debtor-creditor relationship. There were no notes, terms, interest, or repayments.

• Ten years with no repayment undermined any claim of intent to require repayment.

• Evidence suggested repayment depended on corporate earnings, pointing to equity.

• Worthlessness timing was not established. Multiple years were asserted without proof.

• IRS processing of an amended return does not bind later years. Each year stands alone.

• Even assuming a valid loss, §172 required absorption in earlier years. No NOL could reach 2018.

• Failure to file while disputing other years is not reasonable cause.

• Estimated tax penalties are applied and have no general reasonable-cause exception.

Forward-Looking Implications

• Shareholder advances should be documented like third-party loans.

• Maintain objective evidence of repayment and enforcement.

• Track and apply NOLs strictly in accordance with statutory ordering rules.

• File current returns even when prior years remain disputed.

The Takeaway

Claims of bad debt and NOL relief fail without proof of real loans, clear timing of worthlessness, and proper NOL absorption. Filing delays and informal arrangements invite penalties.

List of Citations

• §166. Defines bad-debt deductions and bona fide debt.

• §172. Governs NOL carrybacks and carryovers.

• §§6651 and 6654. Impose additions to tax for filing, payment, and estimated taxes.