Failure to document a transfer of funds between related parties as a loan may lead to the transfer's being characterized as something other than a loan for income tax purposes, notwithstanding the transferee's intent to repay the amount advanced.

Indeed, even if a transfer is evidenced by a promissory note, failure to document the loan by the date of delivery of funds or to reflect in the documentation terms consistent with ordinary business practice in arm's length dealings between a lender and a borrower may result in an advance's being characterized as something other than a loan for tax purposes, to the potential disadvantage of the purported lender or borrower. Two recent cases, Keeton v. Commissioner, 134 AFTR 2d 2024-5992 (9th Cir.), affirming TC Memo 2023-35, and Feathers v. Commissioner, TC Memo 2024-88, illustrate these points.