T.C. Memo. 1998-264
UNITED STATES TAX COURT
JOHN J. KAISER and SOFIA P. KAISER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 20118-84, 14503-85. Filed July 20, 1998.
John J. Kaiser, pro se.
Robert Saal, for respondent.
MEMORANDUM OPINION
WELLS, Judge: In the instant consolidated cases,
hereinafter referred to collectively as case, respondent
determined deficiencies in petitioners' 1980 and 1981 Federal
income taxes in the amounts of $10,497 and $42,343, respectively.
Respondent also determined that part of the underpayment of
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Federal income tax for petitioners' 1981 taxable year was
substantial and attributable to tax-motivated transactions within
the meaning of section 6621(d).1
After concessions,2 the issues for decision are:3 (1)
Whether petitioners have previously "resolved" and "settled" all
issues in the instant case; (2) whether a bad debt deduction in
the amount of $15,064 claimed by petitioners on their 1981 return
should be treated as a business bad debt or a nonbusiness bad
debt; and (3) whether petitioners are entitled to deduct losses
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
Respondent concedes that petitioners are entitled to an
investment tax credit for the 1981 taxable year in the amount of
$713 and that no portion of any deficiency determined for the
1981 taxable year is attributable to a tax-motivated transaction
within the meaning of sec. 6621(d).
In the notices of deficiency, respondent disallowed losses
claimed by petitioners on Schedule E of their 1980 and 1981
Federal income tax returns in the amounts of $14,033 and $67,033,
respectively, which losses related to certain equipment leasing
activities. Petitioners and respondent agree that petitioners
are entitled to losses from those activities for petitioners'
1980 and 1981 taxable years in the amounts of $20,232 and
$55,037, respectively.
3
Respondent served petitioners with a request for admissions
pursuant to Rule 90(a) and filed the same with the Court pursuant
to Rule 90(b). Petitioners failed to respond to respondent's
request for admissions. Consequently, each matter set forth
therein is deemed admitted pursuant to Rule 90(c). Alexander v.
Commissioner, 926 F.2d 197, 198-199 (2d Cir. 1991), affg. per
curiam T.C. Memo. 1990-315; Marshall v. Commissioner, 85 T.C.
267, 272 (1985); Morrison v. Commissioner, 81 T.C. 644, 647
(1983). Respondent did not rely on the deemed admissions,
however, and proceeded at trial as if they did not exist.
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from an activity entitled "Computer Books + Tapes" claimed on
Schedule C of their 1980 and 1981 returns.
Some of the facts have been stipulated and are so found.
The stipulation of facts is incorporated herein by reference, and
they are found accordingly. Petitioners resided in Briarcliff
Manor, New York, at the time they filed their petitions.
1. Whether All Issues Have Been "Resolved" and "Settled"
Preliminarily, we address petitioners' contention that they
have "settled" and "resolved" all issues in the instant case.
Petitioners argue that they previously reached agreement with
respondent concerning all issues in the instant case and that
they previously submitted checks to respondent in full
satisfaction of all taxes and interest owed for the years in
issue. Petitioners point to certain payments they allege to have
been made to the Internal Revenue Service which, petitioners
allege, "totally resolved" all issues in the instant case.
Respondent argues that although petitioners may have made
payments, such payments were applied to taxable years other than
those at issue in the instant case, and, in any event, that
payments made by petitioners after the notice of deficiency is
mailed do not affect our jurisdiction to decide the correctness
of the asserted deficiencies and income tax overpayments.
We agree with respondent. Petitioners misunderstand the
purpose of the instant proceedings. Respondent determined
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deficiencies in petitioners' 1980 and 1981 Federal income taxes.
A deficiency is generally defined as an amount by which the
income, gift, or estate tax due under the law exceeds the amount
of such tax shown on the return. Sec. 6211; Bregin v.
Commissioner, 74 T.C. 1097, 1102 (1980).
Section 6212(a) provides that if the Secretary determines
that there is a deficiency, he is authorized to send notice of
such deficiency to the taxpayer. Pursuant to section 6213(a),
the taxpayer may then file a petition with the Tax Court, within
a specified time, for a redetermination of the deficiency.
Section 6214 provides that this Court has jurisdiction to
redetermine the correct amount of tax deficiencies that are
contested in timely petitions filed by taxpayers. Sec. 6214(a);
see also sec. 6213. If this Court finds that there is no
deficiency and further finds that the taxpayer has made an
overpayment of tax for the same taxable year, section 6512(b)
provides that "the Tax Court shall have jurisdiction to determine
the amount of such overpayment".
Accordingly, the function of this Court is to decide the
correctness of the deficiency determined by respondent and the
amount thereof, if any, or that there is an overpayment of tax.
See Hannan v. Commissioner, 52 T.C. 787 (1969). The fact that
petitioners may have made payments towards the deficiencies
determined by respondent does not affect our ability to decide
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the instant case. A taxpayer may pay the deficiency and interest
at any time after the notice of deficiency is mailed and still be
entitled to his "day" in this Court. Sec. 6213(b)(4); Estate of
Richter v. Commissioner, 16 B.T.A. 936, 937 (1929). The taxpayer
who so pays the deficiency and interest and then prevails will be
entitled to a refund or credit, sec. 6512(b)(3)(A), as well as
interest thereon. Sec. 6611.4
2. Bad Debt Deduction for 1981
From January 1, 1979 through June 23, 1981, petitioner John
J. Kaiser (petitioner) was the 100-percent shareholder of MACS
Corp. (MACS), an S corporation in the business of buying and
selling cleaning supplies in the Bridgeport, Connecticut, area.
During 1979 and subsequent years through 1981, petitioner
advanced a total of $111,725 to MACS. On its 1981 Form 1120S
(U.S. Small Business Corporation Income Tax Return) MACS reported
paid-in or capital surplus in the amount of $1,000 and loans from
shareholders in the amount of $110,725.
On their 1979, 1980, and 1981 Federal income tax returns,
petitioners claimed losses from MACS in the total amount of
$95,661 and reduced petitioner's basis in the shareholder loans
4
Petitioners have not presented us with any argument that the
alleged payments were improperly applied by respondent or that
they were deposits against the deficiencies determined by
respondent. See Risman v. Commissioner, 100 T.C. 191 (1993).
Indeed, there would be insufficient facts in the record before us
to decide such issue.
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to $15,064. MACS filed a final Form 1120S for its short taxable
year ending June 23, 1981. On their 1981 Federal income tax
return, petitioners claimed a deduction for a business bad debt
in the amount of $15,064. In the notice of deficiency,
respondent determined that petitioners are not entitled to a bad
debt deduction for the 1981 taxable year. On brief, however,
respondent concedes that petitioners are entitled to a deduction
for a bad debt of $15,064 for their 1981 taxable year, but
characterizes the deduction as a nonbusiness bad debt.
A taxpayer who claims a deduction bears the burden of
substantiating the amount and purpose 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.
Section 166(a)(1) provides, in general, for the deduction of
debts that become wholly worthless during a taxable year.
Section 166, however, distinguishes between business bad debts
and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(b), Income
Tax Regs. Business bad debts may be deducted against ordinary
income if they become wholly or partially worthless during the
year (in the case of the latter, to the extent charged off during
the taxable year as partially worthless debts). Sec. 1.166-3,
Income Tax Regs. To qualify for the business bad debt deduction,
the taxpayer must establish that the debt was proximately related
to the conduct of the taxpayer's trade or business. United
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States v. Generes, 405 U.S. 93, 103 (1972); sec. 1.166-5(b),
Income Tax Regs.
Nonbusiness bad debts, on the other hand, may be deducted,
but only if they become entirely worthless during the year
claimed; they are, moreover, to be treated as short-term capital
losses. Sec. 166(d). Generally, a nonbusiness bad debt is a
debt other than a debt (1) created or acquired in the trade or
business of the taxpayer or (2) the loss from the worthlessness
of which is incurred in a trade or business of the taxpayer.
Sec. 166(d)(2).
Whether a debt is characterized as business or nonbusiness
is a question of fact. Sec. 1.166-5(b)(2), Income Tax Regs. The
burden is on petitioner to prove that he was engaged in a trade
or business, and that his worthless loans constituted business,
rather than nonbusiness bad debts. Rule 142(a); United States v.
Generes, supra at 104; Whipple v. Commissioner, 373 U.S. 193, 202
(1963).
Being an employee may constitute a trade or business.
Putoma Corp. v. Commissioner, 66 T.C. 652, 673 (1976), affd. 601
F.2d 734 (5th Cir. 1979). In the instant case, however,
petitioners have failed to offer sufficient evidence to prove
that petitioner was an employee of MACS. Indeed, the evidence in
the record indicates otherwise. The only Federal income tax
return for MACS in the record does not show any compensation to
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officers or any salaries or wages paid. Petitioner testified
that he was not an employee of MACS but that he was chairman of
its board of directors. At trial, when petitioner was asked if
he received a salary from MACS, he testified that he received a
salary in the form of rent paid by MACS for use of a warehouse he
owned.5 Under the circumstances, we hold that petitioner was not
an employee of MACS.
Even if petitioner were an employee of MACS, he has not
shown that the loans were "necessary to keep his job or [were]
otherwise proximately related to maintaining his trade or
business as an employee." Whipple v. Commissioner, supra at 204.
Moreover, we believe that petitioner's dominant motive for making
the loans was to protect his investment. See United States v.
Generes, supra at 103 ("We conclude that in determining whether a
bad debt has a 'proximate' relation to the taxpayer's trade or
business, as the Regulations specify, and thus qualifies as a
business bad debt, the proper measure is that of dominant
motivation, and that only significant motivation is not
sufficient.").
On the record before us, we hold that petitioners have
failed to present sufficient evidence to establish that they are
5
Petitioner did not show what the rent was, or that he was in
the business of leasing the warehouse to MACS, much less that the
dominant reason for the loan was to protect any such business.
Cf. Commissioner v. Moffat, 373 F.2d 844 (3d Cir. 1967), affg.
T.C. Memo. 1965-183.
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entitled to a deduction for a business bad debt. Consequently,
we sustain respondent's determination that the loss in question
constituted a nonbusiness bad debt.
3. Schedule C Losses
Petitioners filed Schedules C with their 1980 and 1981
Federal income tax returns reporting net losses from an activity
entitled "Computer Books + Tapes" in the respective amounts of
$6,880 and $1,162. Respondent determined, inter alia, that such
activity was not entered into for profit, and, consequently,
disallowed the claimed losses pursuant to section 183(a).
Section 183(a) generally limits the amount of expenses that
a taxpayer may deduct with respect to an activity "not engaged in
for profit" to the deductions provided in section 183(b).
Section 183(b)(1) provides that deductions that would be
allowable without regard to whether such activity is engaged in
for profit are to be allowed. Section 183(b)(2) further
indicates that deductions which would be allowable only if such
activity were engaged in for profit are to be allowed, but only
to the extent that the gross income derived from such activity
for the taxable year exceeds the deductions allowable under
section 183(b)(1). An activity is "not engaged in for profit" if
it is an activity other than one with respect to which deductions
are allowable for the taxable year under section 162 or section
212(1) or (2). Sec. 183(c).
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To prove that an activity is engaged in for profit, the
taxpayer must show that the activity was engaged in with an
actual and honest objective of making a profit. E.g., Hulter v.
Commissioner, 91 T.C. 371, 392 (1988); Dreicer v. Commissioner,
78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205
(D.C. Cir. 1983). Although the taxpayer's expectation of a
profit need not be reasonable, a good faith objective of making a
profit is required. E.g., Dreicer v. Commissioner, supra; Dunn
v. Commissioner, 70 T.C. 715, 720 (1978), affd. on another issue
615 F.2d 578 (2d Cir. 1980); sec. 1.183-2(a), Income Tax Regs.
Petitioners offered no evidence that they pursued the
"Computer Books + Tapes" activity with the requisite profit
objective, and, accordingly, we sustain respondent's disallowance
of the losses claimed from such activity.
To reflect the foregoing,
Decisions will be entered
under Rule 155.