Keeton decision: U.S. Tax Court denies a bad debt deduction – Treats advances as equity and not debt

by | Mar 30, 2023

ARTICLE | March 30, 2023

The Keeton v. Comm’r decision is yet another reminder of the importance of properly documenting debt and understanding the risks associated with not doing so. In this case, the Tax Court denied the taxpayers a bad debt deduction due to the lack of documentation proving the advances were true debt. This case highlights the need for taxpayers to ensure cash advances between related parties are documented as debt in order for it to be treated as such for tax purposes.

Taxpayers should understand the risk they take on when they fail to properly document and substantiate amounts. It is important to consult with a tax professional at the outset in order to avoid any potential issues down the line.

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