T.C. Memo. 1995-586
UNITED STATES TAX COURT
MARIA D. LERMA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18324-94. Filed December 12, 1995.
Maria D. Lerma, pro se.
Frank R. Hise, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of $8,913
in petitioner's Federal income tax for 1987 and an addition to
tax of $2,228 pursuant to section 6651(a)(1). Unless otherwise
indicated, all section references are to the Internal Revenue
Code in effect for the year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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After concessions, the deficiency and the addition to tax in
dispute are in the amounts of $5,610 and $1,402, respectively.
The issues remaining for decision are whether petitioner is
entitled to a nonbusiness bad debt deduction for 1987 and whether
petitioner is liable for the addition to tax for failure to file
timely her tax return for that year.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference. At the
time the petition was filed, petitioner resided in San Antonio,
Texas.
In 1987, petitioner left her job to return to school to seek
her master's degree in nursing. Petitioner withdrew money from
her retirement plan in order to finance her education and to
support her family while she attended school.
During 1987, petitioner was dating Raul Machuca (Machuca).
Machuca was experiencing financial difficulties, and petitioner
attempted to assist him. For example, to prevent his car from
being repossessed, Machuca transferred the title to the car to
petitioner, and petitioner, using the car as collateral, borrowed
$9,500. Petitioner never drove or possessed the car. When
petitioner paid off the loan, title to the car was transferred
back to Machuca. Machuca later gave petitioner a check for
$50,000 as partial payment for this and other assistance
petitioner had given Machuca. Petitioner was unable to cash the
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check because Machuca's account lacked sufficient funds. The
relationship between petitioner and Machuca deteriorated around
this time.
In 1988, petitioner experienced financial difficulties. She
did not file her 1987 Federal income tax return until September
1991 because she was unable to pay the taxes due. On the return
filed in 1991, petitioner claimed $77,000 on Schedule D, Capital
Gains and Losses and Reconciliation of Forms 1099-B, as a
nonbusiness bad debt deduction. In an amended return filed in
September 1993, petitioner reclassified $50,000 of the $77,000
bad debt as business bad debt. No documentation or other
evidence of the bad debt exists.
OPINION
Bad Debt Expense
Section 166(a) provides a deduction for any debt that
becomes worthless within the taxable year. At trial, petitioner
conceded that there was no basis for classifying as a business
bad debt any portion of the bad debt deduction that she claimed.
A nonbusiness bad debt is considered a loss from the sale or
exchange of a short-term capital asset. Sec. 166(d)(1)(B).
"Only a bona fide debt qualifies for purposes of section
166. A bona fide debt is a debt which arises from a debtor-
creditor relationship based upon a valid and enforceable
obligation to pay a fixed or determinable sum of money." Sec.
1.166-1(c), Income Tax Regs. Petitioner bears the burden of
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proving, first, that a bona fide debt existed and, second, that
it became worthless in 1987. Rule 142(a); Crown v. Commissioner,
77 T.C. 582, 598 (1981); Rude v. Commissioner, 48 T.C. 165, 172
(1967).
In determining whether a debtor-creditor relationship
represented by a bona fide debt exists, the Court considers the
facts and circumstances. Fisher v. Commissioner, 54 T.C. 905,
909 (1970). The test in making such a determination is whether
the debtor is under an unconditional obligation to repay the
creditor and whether the creditor intends to enforce repayment of
the obligation. Id. at 909-910; sec. 1.166-1(c), Income Tax
Regs.
The objective indicia of a bona fide debt include whether a
note or other evidence of indebtedness existed and whether
interest was charged. See Clark v. Commissioner, 18 T.C. 780,
783 (1952), affd. 205 F.2d 353 (2d Cir. 1953). Also considered
are the existence of security or collateral, the demand for
repayment, records that may reflect the transaction as a loan,
and the borrower's solvency at the time of the loan. See Road
Matls., Inc. v. Commissioner, 407 F.2d 1121 (4th Cir. 1969),
affg. in part, vacating in part and remanding T.C. Memo. 1967-
187; Jewell Ridge Coal Corp. v. Commissioner, 318 F.2d 695, 699
(4th Cir. 1963), affg. T.C. Memo. 1962-194; Zimmerman v. United
States, 318 F.2d 611, 613 (9th Cir. 1963); Montgomery v. United
States, 87 Ct. Cl. 218, 23 F. Supp. 130 (1938).
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In this case, petitioner testified that she intended that
the debt be repaid. Petitioner did not call Machuca as a witness
and did not present any reliable evidence of Machuca's financial
position in 1987. On the minimal evidence presented, and in view
of the personal relationship between petitioner and Machuca, we
cannot conclude that there is a bona fide, enforceable obligation
to repay. See Caligiuri v. Commissioner, 549 F.2d 1155, 1157
(8th Cir. 1977), affg. T.C. Memo. 1975-319; Perry v.
Commissioner, 92 T.C. 470, 481 (1989), affd. without published
opinion 912 F.2d 1466 (5th Cir. 1990). As a result of
petitioner's failure to prove the existence of a bona fide debt,
we need not consider whether the "loans" became worthless in
1987. Petitioner is not entitled to any deductions with respect
to the advances she made to Machuca; therefore, respondent's
determination is sustained on this issue.
Section 6651(a)(1) Addition to Tax
Section 6651(a)(1) provides for an addition to tax in the
case of the failure to file a timely return unless it is shown
that such failure is due to reasonable cause and not due to
willful neglect. Petitioner bears the burden of proving that
respondent's determination on this issue is erroneous. Rule
142(a); Lee v. Commissioner, 227 F.2d 181, 184 (5th Cir. 1955),
affg. a Memorandum Opinion of this Court dated July 31, 1953. At
trial, petitioner testified that she did not timely file her 1987
Federal income tax return because she lacked the money to pay the
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taxes owed. Petitioner's unfortunate personal and financial
circumstances do not constitute reasonable cause for failure to
file a timely tax return. See Jones v. Commissioner, 25 T.C.
1100, 1105-1106 (1956), revd. on other grounds 259 F.2d 300 (5th
Cir. 1958); Sanders v. Commissioner, 21 T.C. 1012, 1019 (1954),
affd. 225 F.2d 629 (10th Cir. 1955); Nelson v. Commissioner, T.C.
Memo. 1974-239; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Therefore, respondent's determination will be sustained.
Decision will be entered
for respondent in the amounts
of the reduced deficiency and
addition to tax.