T.C. Memo. 1999-40
UNITED STATES TAX COURT
MYER B. BARR AND ESTATE OF DIANA L. BARR, DECEASED, WILLIAM M.
MARCUS, RONNIE S. TRAYNOR AND MARIE L. COTTON, PERSONAL
REPRESENTATIVES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17491-97. Filed February 8, 1999.
Donald F. Mintmire, for petitioners.
Alison W. Lehr, for respondent.
MEMORANDUM OPINION
PARR, Judge: Respondent determined a deficiency in
petitioners' Federal income tax for the taxable year 1993 in the
amount of $30,720.
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All section references are to the Internal Revenue Code in
effect for the taxable year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. References to petitioner are to Myer B.
Barr.
The issues for decision are: (1) Whether for 1993
petitioners are entitled to a $100,000 nonbusiness bad debt
deduction related to a transaction with Super City Meats, Inc.
(Super City Meats). We hold they are. (2) Whether for 1993
petitioners are entitled to charitable contribution deductions in
excess of the amount allowed by respondent. We hold they are to
the extent set forth below.
Some of the facts have been stipulated and are so found.
The stipulated facts and the accompanying exhibits are
incorporated herein by this reference. At the time the petition
in this case was filed, petitioner resided in Palm Beach,
Florida.
For convenience, we combine our findings of fact with our
opinion under each separate issue heading.1
Issue 1. Bad Debt
Respondent determined that for 1993 petitioners were not
entitled to a $100,000 nonbusiness bad debt deduction related to
a transaction with Super City Meats.
1
We have considered each of the parties' arguments and,
to the extent that they are not discussed herein, find them to be
unconvincing.
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Section 166 entitles a taxpayer to a deduction for a bad
debt that becomes worthless during the taxable year. A business
bad debt can be deducted from ordinary income if it is either
partially or totally worthless. Sec. 166(a). A nonbusiness bad
debt, however, is treated as a short-term capital loss. Sec.
166(d). Petitioners bear the burden of proving that a bona fide
debt exists and that the debt became worthless during the taxable
year in issue. Rule 142(a).
Petitioner has two sons, Jeffrey Barr (Jeffrey) and Stephen
Barr (Stephen). Petitioner has a close relationship with
Jeffrey; however, he is estranged from Stephen for personal
reasons and maintains no contact with him.
Super City Meats, of which Stephen was president and 50
percent co-owner, sold products to various Chinese restaurants.
On September 13, 1990, Jeffrey advanced Stephen $100,000. The
purpose of this advance was to provide working capital for Super
City Meats. The advance was to be used to interview and hire a
new manager, pay off debts to a former supplier, and make
purchases from new suppliers.
A promissory note (the note) in the amount of $100,000 was
executed by Stephen personally and as president of Super City
Meats to Jeffrey several days after the advance, but it was dated
September 13, 1990. Jeffrey required Stephen to sign the note
personally as an added assurance of repayment. The note bore
interest at 13 percent per annum.
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Jeffrey expected that he would be repaid in approximately 18
months. The repayment was to be made from certain insurance
proceeds that Super City Meats was to receive. The insurance
proceeds were from policies on Stephen's business partner, the
executive manager and other 50 percent co-owner of Super City
Meats, who had been murdered on the business premises in July of
1990. During that time, Super City Meats was also having
problems with sales and collecting receivables due to alleged
pressure from the Chinese mafia. When Jeffrey advanced Stephen
the $100,000, he was aware that Stephen's business partner had
been murdered.
Petitioner is a graduate of the University of Pennsylvania
and Harvard Law School. At that time, petitioner was retired and
invested in various fields, especially mutual bond funds. On
February 28, 1991, petitioner and Jeffrey executed an agreement
where Jeffery transferred to petitioner his rights created under
the note for $100,000.2 Petitioner testified that he acquired
the note because he considered it a good investment. Petitioner
testified that at that time his investments paid between 7 and 9
percent interest, and the original 13 percent interest on the
note was an attractive investment. On their 1993 Federal income
tax return, petitioners reported taxable interest of $73,672 and
tax-exempt interest of $207,628. In addition, petitioners
2
Petitioners' 1993 Federal income tax return, however,
indicates an acquisition date of Sept. 13, 1990.
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reported $1,093,778 of capital gains on their 1993 Federal income
tax return.
When petitioner purchased the note, he did not consult with
any advisers or perform any independent research regarding Super
City Meats. Furthermore, when petitioner purchased the note, he
had no knowledge of the murder of Stephen's business partner or
the alleged problems with the Chinese mafia. Jeffrey continued
to manage the note, and Stephen was not informed that petitioner
had purchased it.
In February 1992, Stephen was indicted for the July 1990
murder of his business partner. The indictment against Stephen
was not dismissed until August of 1993. As a consequence of
defending himself against the criminal indictment, Stephen
"didn't have a dime." In 1993, Stephen was unemployed, he and
his wife were provided living expenses by his mother-in-law, and
he carried in excess of $100,000 of credit card debt.
The insurance companies refused to pay on the policies of
Stephen's murdered business partner. The insurance proceeds were
never paid to Super City Meats or any of its representatives.
On September 30, 1993, Stephen acknowledged in a letter to
Jeffrey that he did not have the current ability to repay the
advance and the required interest. On October 11, 1993, Stephen
further acknowledged in a letter to Jeffrey that it was unlikely
he would ever have the resources to repay the debt.
On their 1993 Federal income tax return, petitioners claimed
a nonbusiness bad debt deduction of $100,000. The burden of
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proof is on petitioners to show that the transaction at issue was
a bona fide loan. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). We always examine intrafamily transactions with
special scrutiny. 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); Bragg v. Commissioner,
T.C. Memo. 1993-479. The presumption is that a transfer between
family members is a gift. Perry v. Commissioner, supra at 481;
Estate of Reynolds v. Commissioner, 55 T.C. 172, 201 (1970).
This presumption may be rebutted by an affirmative showing that
there existed a real expectation of repayment and intent to
enforce the collection of the indebtedness. Estate of Van Anda
v. Commissioner, 12 T.C. 1158, 1162 (1949), affd. per curiam 192
F.2d 391 (2d Cir. 1951). A mere declaration of intent by the
taxpayer is insufficient if the transaction fails to exhibit more
reliable indicia of debt. See Williams v. Commissioner, 627 F.2d
1032, 1034 (10th Cir. 1980), affg. T.C. Memo. 1978-306; Alterman
Foods, Inc. v. United States, 505 F.2d 873, 877 (5th Cir. 1974).
The determination of whether a transfer was made with a real
expectation of repayment and an intention to enforce the debt
depends on all the facts and circumstances including whether: (1)
There was a promissory note or other evidence of indebtedness;
(2) interest was charged; (3) there was a fixed schedule for
repayment; (4) security or collateral was requested; (5) a demand
for repayment was made; (6) the parties' records, if any, reflect
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the transaction as a loan; (7) any repayments have been made; and
(8) the borrower was solvent at the time of the loan. See Hunt
v. Commissioner, T.C. Memo. 1989-335; see also Zimmerman v.
United States, 318 F.2d 611, 613 (9th Cir. 1963); Estate of
Maxwell v. Commissioner, 98 T.C. 594, 604 (1992), affd. 3 F.3d
591 (2d Cir. 1993); Estate of Kelley v. Commissioner, 63 T.C.
321, 323-324 (1974); Rude v. Commissioner, 48 T.C. 165, 173
(1967); Clark v. Commissioner, 18 T.C. 780, 783 (1952), affd. per
curiam 205 F.2d 353 (2d Cir. 1953); Bragg v. Commissioner, supra.
The factors are not exclusive, and no one factor controls.
Rather, our evaluation of the various factors provides us with an
evidentiary basis upon which we make our ultimate factual
determination of whether a bona fide indebtedness existed. See
Litton Bus. Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973).
With those factors in mind, we turn to the facts and
circumstances surrounding the transaction to determine whether a
bona fide debtor-creditor relationship was created.
1. Promissory Note or Other Evidence of Indebtedness
Petitioners introduced a promissory note to Jeffrey, signed
by Stephen, for $100,000. Petitioners also introduced an
agreement between petitioner and Jeffrey whereby petitioner
purchased the note for $100,000.
2. Interest
The note executed by Stephen to Jeffrey stated that interest
would be paid at the rate of 13 percent per annum on the unpaid
principal amount. At some time after petitioner acquired the
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note, Stephen and Jeffrey lowered the interest rate to 10
percent.
Jeffrey testified that from the time the note was executed
on September 13, 1990, until it was transferred to petitioner on
February 28, 1991, Stephen made timely monthly interest payments
on the note. Jeffrey, however, did not report any interest
income from Stephen on his 1990 and 1991 Federal income tax
returns.
After the note was transferred to petitioner, Jeffrey
continued to collect interest payments. Jeffrey testified that
interest was paid on the note until approximately September 1992.
At that time, Stephen informed Jeffrey that he was struggling and
having trouble collecting his accounts receivable, and that he
would no longer be able to make interest payments on the note.
On his 1992 Federal income tax return, petitioner reported
interest from Stephen in the amount of $2,100, which is
substantially less than the note provided. Petitioner allowed
Jeffrey to keep any interest payments in excess of the $2,100.
On two occasions Jeffrey, his wife, and their children visited
petitioner in Florida. During these trips, Jeffrey and his
family incurred expenses for airfare, hotel accommodations,
renting a car, and other travel related expenses. Petitioner
told Jeffrey to keep the interest payments as reimbursement for
whatever travel expenses he incurred.
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3. Fixed Schedule for Repayment
The note did not have a fixed schedule for repayment and had
no fixed maturity date.
4. Security or Collateral
No security or collateral was requested.
5. Demand for Repayment
A formal demand for payment was made by Jeffrey, on behalf
of petitioner, in a letter to Stephen dated August 7, 1993.
Jeffrey also wrote letters to counsel for Super City Meats
seeking payment on the note.
6. Records of the Loans
The parties' personal records reflect the transaction as a
loan.
7. Actual Repayments
The record indicates that some interest payments were made.
8. Solvency of the borrower
Both Super City Meats and Stephen were solvent at the time
of the loan.
We believe that when Jeffrey made the advance to Stephen, he
had a real expectation that he would be repaid. He knew that
Super City Meats was the beneficiary of life insurance on
Stephen's co-owner, and he fully expected to be repaid from the
insurance proceeds. By lending $100,000 to his brother, Jeffrey
placed himself in a precarious personal and financial situation.
First, Jeffrey testified that he did not have that type of money
in his checking account and had to borrow against his securities
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account at 10 to 12 percent interest. Second, Jeffrey also
testified that his wife was furious when he told her about the
loan. Third, at that time, Jeffrey had left his job at Citibank
where he had been employed for 17 years. He had gone to work for
a small consulting firm and stated that "the first day I joined
them, I knew that it was a big mistake." Jeffrey's wife had also
taken a leave of absence from her job due to pregnancy.
Jeffrey's financial situation did not allow him to make the
advance without the expectation of repayment. A bona fide loan
existed between Jeffrey and Stephen.
When petitioner purchased the note, he stepped into
Jeffrey's shoes as the creditor and was entitled to the same
rights created under the note. See, e.g., First Union Natl. Bank
of Florida v. Hall, 123 F.3d 1374 (11th Cir. 1997); Underhill v.
Commissioner, 45 T.C. 489 (1966). A bona fide loan existed
between petitioner and Stephen, and we believe that petitioner
shared Jeffrey's expectation of repayment. Furthermore, we had
an opportunity to observe petitioner's demeanor at trial and we
find him to be credible. Accordingly, petitioners are entitled
to the $100,000 nonbusiness bad debt deduction for 1993.
Issue 2. Charitable Contributions
Respondent determined that for 1993 petitioners were not
entitled to certain deductions for charitable contributions.
We begin by noting that, as a general rule, the
Commissioner's determinations are presumed correct, and the
taxpayer bears the burden of proving otherwise. Rule 142(a);
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Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover,
deductions are strictly a matter of legislative grace, and the
taxpayer has the burden of establishing entitlement to any
deduction claimed on the return. Deputy v. duPont, 308 U.S. 488,
493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934).
The taxpayer's burden of establishing his entitlement to a
deduction includes the burden of substantiation. Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976). The Court is not bound to accept
unverified, undocumented testimony of the taxpayer. Id.
Accordingly, section 6001 and the regulations promulgated
thereunder require the taxpayer to maintain records sufficient to
enable the Commissioner to determine the taxpayer's correct tax
liability. Meneguzzo v. Commissioner, 43 T.C. 824, 831-832
(1965); sec. 1.6001-1(a), Income Tax Regs.
Petitioners claimed $7,603 of charitable contributions by
cash or check on their 1993 Federal income tax return.
Petitioners substantiated cash and check contributions in the
amount of $4,051, and respondent disallowed the remaining $3,552.
Petitioners have failed to meet their burden regarding the
disallowed contributions by cash or check. Accordingly,
respondent's disallowance of the charitable contributions by cash
or check in the amount of $3,552 is sustained.
Petitioners also claimed $20,138 of charitable contributions
other than by cash or check on their 1993 Federal income tax
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return. Respondent allowed $14,224 of the charitable
contributions other than by cash or check. If a taxpayer claims
a deduction for a charitable contribution of property other than
money, the amount of the contribution is the fair market value of
the property at the time of the contribution reduced as provided
in section 170 and the regulations promulgated thereunder. Sec.
1.170A-1(c)(1), Income Tax Regs. The fair market value is the
price at which the property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to
buy or sell and both having reasonable knowledge of relevant
facts. Sec. 1.170A-1(c)(2), Income Tax Regs.
In light of some confusion at trial and on brief, and to
remedy certain computational errors in the stipulation of facts,
we set forth the allowable contributions other than by cash or
check below. Respondent allowed the following amounts for
noncash charitable contributions:
Claimed Allowed
Morse Geriatric1 $1,342 $413
New Eyes for the Needy 585 100
Hadassah Bargain Spot 1,426 507
Animal Rescue League 1,526 -0-
Science Museum 250 -0-
Lions SightFirst 90 -0-
Municipal Library 450 64
Jewish Federation 12,581 12,581
JCC Thrift Store 1,783 507
Brandeis University 105 52
$20,138 $14,224
1
We note that the full name of this institution is the
Nearly New Thrift Shop of the Morse Geriatric Center and is
therefore represented twice in the stipulation of facts.
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Petitioner testified regarding certain contributions that
respondent disallowed entirely. Petitioner provided a receipt
from the Animal Rescue League listing values, but he stated that
he had no recollection of what the items were, other than a
Chanel bag. We shall allow $99.50 for this single item as a
donation to the Animal Rescue League. Petitioner also introduced
a letter from The Science Museum thanking him for his
contribution, which he testified was a stamp collection and a
telescope. We shall allow $50 as a donation to The Science
Museum. Finally, petitioner introduced what appears to be an
advertisement for Lions SightFirst with "3 pairs prescription
sunglasses" written above it. We shall allow $30 as a donation
to Lions SightFirst.
Petitioners have failed to meet their burden of proving the
fair market value of the other donated property is higher than
that allowed by respondent. Accordingly, the amount of
petitioners' charitable contributions other than by cash or check
is $14,403.50.
For the foregoing reasons,
Decision will be entered
under Rule 155.