Take the case of a family business that advanced $111 million to one son to help him start business ventures. Eventually, when the advances weren’t repaid, the business wrote them off as bad debts. But an appellate court, affirming the Tax Court, said the advances weren’t loans (no bona fide debtor-creditor relationship), so no bad debt deduction was allowed. And they weren’t ordinary and necessary business expenses, so there was no other way to deduct them. The lesson: family transactions attract special scrutiny from the IRS, so be sure that they’re handled properly.
