T.C. Memo. 1999-244
UNITED STATES TAX COURT
DANIEL F. NIX AND GAYLE H. NIX, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14447-96. Filed July 28, 1999.
J. Winston Krause, for petitioners.
Thomas F. Eagan, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency of $14,036
in petitioners' Federal income tax for 1991 and an accuracy-
related penalty under section 6662(a) of $2,735.
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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1991, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
After settlement, the primary issue for decision is whether
petitioners are entitled to deductions for claimed losses
relating to a closely held corporation. All references to
petitioner are to Daniel F. Nix.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioners resided in
Austin, Texas.
In 1986, petitioner was employed in the telecommunications
industry as a sales director. While in this position, petitioner
identified what he regarded as a new market for single line
telephones to complement more expensive business telephone
systems that his employer sold.
On April 17, 1987, after investigation and consultation with
others, petitioners, David Morales (Morales), and John Amos
(Amos) formed Telim Communications Corp. (Telim) as a California
corporation to manufacture and sell single line telephones. The
board of directors of Telim consisted of Morales, Amos, and
Mrs. Nix.
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Morales served as chief executive officer of Telim, Amos as
vice president of operations, petitioner as vice president, and
Mrs. Nix as the secretary and chief financial officer. The Telim
stock was to be treated as section 1244 stock. Upon
incorporation, petitioners were issued 3,000 shares of stock in
Telim, and Morales and Amos were issued 3,000 shares of stock
each.
Telim arranged to have single line telephones manufactured
in Taiwan and imported to and sold in the United States. The
telephones received from Taiwan were defective, and Telim was
required to rebuild the telephones before sale to customers. Due
to delays and limited sales, Telim realized no profits.
Prior to incorporation of Telim in April of 1987,
petitioners spent $39,651 of their funds in startup expenses
relating to Telim.
From April to the end of September 1987, petitioners spent
an additional $25,046 of their funds to pay expenses of Telim,
and on September 29, 1987, an additional 25,000 shares of Telim
stock were issued to petitioners.
In October and November of 1987, petitioners spent an
additional $30,000 of their funds to pay expenses of Telim, and
on November 4, 1987, an additional 16,000 shares of Telim stock
were issued to petitioners.
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With regard to petitioners’ funds that were used to pay
expenses of Telim, no promissory notes were issued by Telim to
petitioners, and no repayments were made by Telim to petitioners.
As of the end of 1987, as a result of the defective
telephones and lack of profits, Telim’s business operations were
effectively terminated. On January 1, 1988, a Telim corporate
resolution authorized Amos to sell Telim's capital equipment in
Taiwan and to pay off Telim's debts in Taiwan. Petitioners were
authorized to sell Telim's assets located in the United States in
order to pay off Telim's remaining debts. The Telim shares of
stock owned by Morales and Amos were transferred to petitioners
in exchange for releases of Morales and Amos from any debt
obligations of Telim.
On January 1, 1988, Morales and Amos resigned as officers of
Telim.
On October 11, 1991, petitioners sold for a gain of $26,713
their personal residence in Novato, California, and petitioners
moved to Austin, Texas. Petitioner's employer paid $18,419 of
petitioners' moving expenses to Texas. Petitioners built a new
residence in Austin that was completed in March of 1994, at which
time petitioners moved into the new residence.
Telim’s 1987 corporate Federal income tax return reflected a
total of $16,623 as loans to shareholders.
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Telim’s 1988 corporate Federal income tax return reflected a
total of $15,603 as loans to shareholders.
Telim’s 1989 corporate Federal income tax return reflected
no income, no tax liability, and no loans to shareholders. This
was the final corporate Federal income tax return filed on behalf
of Telim.
On their 1989 joint Federal income tax return, petitioners
claimed a section 1244 ordinary loss of $28,000 relating to their
Telim stock.
On their 1990 joint Federal income tax return, petitioners
did not claim any losses relating to their investment in Telim.
On their 1991 joint Federal income tax return, petitioners
deferred the $26,713 gain from sale of their California
residence, and they claimed a $21,368 moving expense deduction.
Petitioners did not claim thereon any losses relating to their
investment in Telim.
On audit of petitioners' 1989 joint Federal income tax
return, respondent disallowed the $28,000 claimed section 1244
ordinary loss relating to petitioners’ Telim stock, and
petitioners filed with regard thereto a petition with this Court
in Nix v. Commissioner, docket No. 5120-93. Respondent and
petitioners reached a settlement in that case in which $22,400 of
the claimed $28,000 section 1244 ordinary loss was allowed to
petitioners for 1989.
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On audit of petitioners' 1990 joint Federal income tax
return as originally filed with respondent, respondent made no
adjustments to petitioners’ return. Thereafter, on April 15,
1994, petitioners filed with respondent an amended 1990 joint
Federal income tax return on which petitioners claimed a refund
of $5,597, based upon a $51,643 claimed capital loss relating to
purported worthless loans made to Telim and an additional $22,000
claimed section 1244 ordinary loss relating to petitioners’
shares of stock in Telim. On March 26, 1996, respondent
disallowed petitioners’ claim for refund for 1990.
On audit of petitioners’ 1991 joint Federal income tax
return, respondent, among other things, determined that, due to
petitioners’ failure to purchase their replacement residence
within the 2-year rollover period, petitioners were taxable on
the $26,713 gain realized on sale of their personal residence in
California.
In their petition filed herein with regard to 1991 and at
trial, petitioners argue that of the $51,643 capital loss claimed
on petitioners’ amended 1990 joint Federal income tax return,
$3,000 was claimed as a loss on the amended 1990 return and the
remaining $48,643 should be available as a capital loss carryover
to 1991 and should offset the $26,713 capital gain recognized on
sale of petitioners' residence.
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Petitioners also argue that the $22,000 section 1244
ordinary loss claimed on their amended 1990 joint Federal income
tax return should be recharacterized and now also be treated as a
nonsection 1244 capital loss and be available as a capital loss
carryover to 1991.
OPINION
In general, taxpayers bear the burden of proving that they
are entitled to claimed losses, and taxpayers are expected to
maintain adequate records to substantiate claimed losses. See
sec. 6001; Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).
Respondent argues, among other things, that due to lack of
substantiation, petitioners are not entitled to any of
petitioners’ claimed bad debt and stock losses relating to Telim.
Respondent also argues that none of the funds petitioners paid to
or on behalf of Telim should be treated as loans (but rather as
part of petitioners’ investment in the capital stock of Telim)
and that whatever stock related losses petitioners incurred in
connection with their investment in Telim should be treated as
section 1244 ordinary losses for 1989 and fully absorbed in 1989
and prior years.
We agree with respondent’s argument. Petitioners have not
substantiated or established the amount of losses they incurred
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with regard to Telim, that any such losses were incurred in 1990,
that funds they paid to or on behalf of Telim (and on which the
alleged bad debt losses are based) constituted loans, and that
whatever losses petitioners incurred with regard to Telim
constituted anything other than section 1244 losses.
No credible evidence supports the existence of the alleged
loans from petitioners to Telim. No promissory notes exist. No
repayments were made to petitioners. To the contrary, with
regard to funds petitioners paid to or on behalf of Telim
petitioners were issued additional stock in Telim. Telim's
corporate Federal income tax returns for 1987 and 1988 showed
only small loans to shareholders, and Telim's corporate Federal
income tax return for 1989 did not reflect any loans to
shareholders.
By the end of 1987, Telim had ceased operations. In 1988,
Telim sold off its assets. In 1989, Telim filed its final tax
return. On petitioners’ 1990 and 1991 joint Federal income tax
returns as originally filed with respondent, petitioners did not
claim any losses relating to petitioners’ investment in Telim.
No credible evidence supports petitioners’ claim that their
losses with regard to Telim should be treated as 1990 losses.
In 1988, petitioners were authorized to sell off assets of
Telim. The evidence does not establish what funds were realized
on such sales and what portion thereof was retained by
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petitioners, if any. Telim’s books and records were not
produced. The amount of petitioners’ losses with regard to their
investment in Telim is not established.
Petitioners’ claim--that all funds they invested in Telim
should be treated as capital losses for 1990 relating to non-
section 1244 stock--is inconsistent with petitioners’ settlement
of their case in this Court involving 1989, pursuant to which
petitioners’ Telim stock was given section 1244 stock treatment.
Petitioners’ attempt to recast funds they invested in Telim as
representing either loans or as nonsection 1244 stock appears to
be nothing more than a belated attempt to manufacture capital
losses to offset capital gain income petitioners admit they
failed to report on their 1991 joint Federal income tax return.
Under section 6662(a), a 20-percent accuracy-related penalty
applies to underpayments of tax attributable to negligence.
Petitioners argue that unforeseen delays in construction of
their new residence caused them to miss the 2-year tax free roll-
over period relating to gain on sale of their California
residence and that they relied on their tax return preparer in
deducting moving expenses paid by their employer.
The credible evidence does not support petitioners’
argument. We sustain respondent’s determination of the accuracy-
related penalty.
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To reflect the foregoing,
A decision will be entered
under Rule 155.