T.C. Memo. 1995-598
UNITED STATES TAX COURT
RICHARD SOO KIM AND DONNA KIM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24243-93. Filed December 19, 1995.
Richard Soo Kim and Donna Kim, pro se.
Brently W. Free, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined a deficiency of $90,593
in petitioner's Federal income tax for 1990 and an addition to
tax of $18,118.60 pursuant to section 6662(a). 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 only issue remaining for decision is
whether petitioners are entitled to a bad debt deduction for 1990
in the amount of $30,500.
Some of the facts have been stipulated, and the stipulated
facts are incorporated herein by this reference. At the time the
petition was filed, petitioners resided in Kirkland, Washington.
Richard Soo Kim (petitioner) owned a business that operated
as a subcontractor for various garment manufacturers.
Petitioner's employees would sew and press the garments before
they were packed and returned to the manufacturers.
Petitioner contends that garments in his possession, which
belonged to certain manufacturers, were stolen by one of his
employees. In order to repay the manufacturers for the missing
garments, petitioner reduced the amount of future invoices to the
manufacturers by the value of the garments. Petitioner deducted
the amount of the invoice reductions on Schedule C, Profit or
Loss From Business, attached to petitioners' 1990 Form 1040,
U.S.,Individual Income Tax Return. Petitioners' apparent
position is that, because subsequent invoices were reduced, the
business did not receive certain income from services the
business performed for the manufacturers. This reduction,
petitioners allege, is a business bad debt.
Petitioners bear the burden of proving that they are
entitled to any claimed deduction. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). This includes
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substantiating the amount of the item claimed. Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
At trial, petitioners failed to provide any evidence to
substantiate the amount of the claimed bad debt deduction.
Petitioners did not provide any invoices or other documentation
showing the reduction in invoice payments. No evidence on the
value of the "stolen" garments was presented. While it is within
the purview of this Court to estimate the amount of allowable
deductions where there is evidence that deductible expenses were
incurred, Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), we
must have some basis on which an estimate may be made. Williams
v. United States, 245 F.2d 559 (5th Cir. 1957). The record
before us contains no evidence upon which we can base such an
estimate. Moreover, the record does not establish the manner in
which petitioners' gross receipts were determined and whether the
reported amounts included or excluded the reductions in issue.
Section 1.166-1(e) provides:
(e) Prior inclusion in income required. Worthless debts
arising from * * * items of taxable income shall not be allowed
as a deduction under section 166 unless the income such items
represent has been included in the return of income for the year
for which the deduction as a bad debt is claimed or for a prior
taxable year.
Petitioners' return was prepared on the cash method, and
presumably they reported only amounts actually received. Thus, we
have no assurance that the reductions taken on the invoices to
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customers are not, in effect, being taken twice.
Petitioners have failed to carry their burden of proving
their entitlement to a bad debt deduction. Section 166(a)
provides a deduction for any debt that becomes worthless within
the taxable year. "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. Petitioners bear the burden of
proving, first, that a bona fide debt existed and, second, that
it became worthless in 1990. 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
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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. C1. 218, 23 F. Supp. 130 (1938).
Petitioners have provided no documentation or other evidence
that would indicate the existence of a bona fide debt. As a
result of petitioners' failure to prove the amount and existence
of bona fide debt, we need not consider whether the "debt" became
worthless in 1990. Respondent's determination is sustained on
this issue.
Although petitioners do not assert alternatively that they
are entitled to a theft loss deduction, we point out here that
this position would have been unsuccessful as well. In order to
sustain a theft loss deduction, petitioners have the burden of
proving that they suffered a loss in the taxable year in question
as a result of a casualty or theft and the amount of such loss.
Axelrod v. Commissioner, 56 T.C. 248, 256 (1971). Petitioners
must also prove that they were the owners of the items stolen.
Draper v. Commissioner, 15 T.C. 135 (1950); see Jensen v.
Commissioner, T.C. Memo. 1979-379; Silverman v. Commissioner,
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T.C. Memo. 1975-255, affd. without published opinion 538 F.2d 320
(3d Cir. 1976); Whiteman v. Commissioner, T.C. Memo. 1973-124.
Petitioners have provided no evidence to prove that a theft
occurred, the amount of the alleged theft, or their ownership of
the garments.
To reflect the foregoing and concessions of the parties,
Decision will be entered
under Rule 155.