T.C. Memo. 2004-71
UNITED STATES TAX COURT
B. SURI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11380-02. Filed March 18, 2004.
B. Suri, pro se.
Gerard Mackey, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined a deficiency of
$169,586 in petitioner’s Federal income taxes for 1999 and
additions to tax under sections 6651(a)(1), 6651(a)(2), and
6654(a). After concessions, respondent now asserts that
petitioner has a deficiency in income tax for 1999 of $24,860 and
is liable for an addition to tax under section 6651(a)(1) of
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$6,215. Respondent concedes that petitioner is not liable for
the addition to tax under section 6651(a)(2) or under section
6654.
The issues for decision are whether petitioner is entitled
to a deduction under section 166 for a bad debt loss in 1999;
whether petitioner is entitled to an interest expense deduction
under section 163; whether petitioner is liable for the addition
to tax for failure to file under section 6651(a)(1); and whether
a penalty should be awarded to the United States under section
6673 by reason of petitioner’s failure to exhaust his
administrative remedies.
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.
Background
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Correspondence and communications between the parties are set
forth in respondent’s motion to compel production of documents
and motion under section 6673. Petitioner resided in New York,
New York, at the time that he filed his petition.
Petitioner was not in a trade or business during 1999 but
received income as a result of investments. In 1999, petitioner
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received $160,321.90 in long-term capital gains, incurred
$1,747.11 in short-term capital losses, and received $1,744.71 in
ordinary dividends. Petitioner incurred and paid $12,575.47 in
investment interest expenses in 1999.
Petitioner’s 1999 income tax return was due, pursuant to an
extension, on August 15, 2000. Petitioner did not file his 1999
income tax return by August 15, 2000, or at any time prior to
June 15, 2003, as set forth below. The notice of deficiency in
this case was sent on April 9, 2002. The notice was based on
total income reported to the Internal Revenue Service (IRS) by
financial institutions with which petitioner did business. On
July 8, 2002, petitioner filed his petition, in which he claimed
that there was no tax due for 1999.
On September 2, 2002, respondent’s Appeals officer wrote to
petitioner asking petitioner to set up a conference for possible
settlement of this case. Petitioner did not respond to the
letter. On January 7, 2003, the Appeals officer again wrote to
petitioner asking that petitioner call Appeals or send the
Appeals officer information that supported petitioner’s case.
On January 14, 2003, this case was set for trial at the
trial session of the Court in New York, New York, beginning on
June 16, 2003. Attached to the notice of trial was the Court’s
Standing Pre-Trial Order that provided, among other things:
You are expected to begin discussions as soon as
practicable for purposes of settlement and/or
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preparation of a stipulation of facts. Valuation cases
and reasonable compensation cases are generally
susceptible of settlement, and the Court expects the
parties to negotiate in good faith with this objective
in mind. All minor issues should be settled so that
the Court can focus on the issue(s) needing a Court
decision.
* * * * * * *
ORDERED that all facts shall be stipulated to the
maximum extent possible. All documentary and written
evidence shall be marked and stipulated in accordance
with Rule 91(b), unless the evidence is to be used to
impeach the credibility of a witness. Objections may
be preserved in the stipulation. If a complete
stipulation of facts is not ready for submission at
trial, and if the Court determines that this is the
result of either party’s failure to fully cooperate in
the preparation thereof, the Court may order sanctions
against the uncooperative party. Any documents or
materials which a party expects to utilize in the event
of trial (except for impeachment), but which are not
stipulated, shall be identified in writing and
exchanged by the parties at least 15 days before the
first day of the trial session. The Court may refuse
to receive in evidence any document or material not so
stipulated or exchanged, unless otherwise agreed by the
parties or allowed by the Court for good cause shown.
* * *
On January 16, 2003, petitioner and the Appeals officer
assigned to the case discussed petitioner’s tax liability.
Petitioner indicated that he would provide information to the
Appeals officer to support his contention that he did not owe any
tax. On January 17, 2003, pursuant to Branerton Corp. v.
Commissioner, 61 T.C. 691 (1974), respondent’s counsel invited
petitioner to a conference on February 13, 2003, at respondent’s
office and informally requested that petitioner produce certain
documents.
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On February 3, 2003, the Appeals officer again wrote to
petitioner to say that he had not received the information he
requested; the Appeals officer gave petitioner another 10 days to
supply the information. Petitioner failed to respond to the
Appeals officer’s letter of February 3, 2003. Petitioner failed
to attend the proposed “Branerton” conference scheduled by
respondent’s counsel for February 13, 2003, failed to furnish
respondent with the documents requested, and failed to contact
respondent for the purpose of rescheduling the conference.
On March 24, 2003, pursuant to Rule 72, respondent served on
petitioner Respondent’s Request for Production of Documents.
None of the requested documents were provided to respondent in
response to this request. On May 5, 2003, respondent filed a
motion to compel petitioner to produce the requested documents.
On May 6, 2003, the Court granted respondent’s motion to compel
the production of documents and ordered petitioner to produce
those documents by May 20, 2003. To the extent that respondent’s
motion requested sanctions if petitioner failed to comply with
the Court’s order, the motion was set for hearing on June 16,
2003. Petitioner did not produce the documents by May 20, 2003,
as ordered by the Court, or at any time prior to the trial date.
On June 3, 2003, respondent’s counsel sent to petitioner a
proposed stipulation of facts and a letter requesting that
petitioner either sign the stipulation or call respondent’s
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counsel immediately to discuss his concerns. Petitioner did not
respond to this letter.
On June 12, 2003, respondent’s counsel called petitioner and
left a message asking that petitioner telephone to discuss the
stipulation of facts. On June 12, 2003, petitioner left
respondent’s counsel a message to the effect that he would not
sign the stipulation because he did not agree with it. On
June 12, 2003, respondent’s counsel left petitioner a message
asking that petitioner meet at 10:00 a.m. on June 13, 2003, to
prepare a stipulation of facts that petitioner would be willing
to sign. On June 13, 2003, petitioner telephoned respondent in
the afternoon and left a message that he was unable to meet that
morning because he had just received respondent’s message
requesting the meeting.
On Sunday, June 15, 2003, petitioner submitted to respondent
a Form 1040, U.S. Individual Income Tax Return, for 1999. In
addition to claiming basis in the stock that he had sold and that
had been determined in the notice of deficiency to result in
capital gains, petitioner claimed bad debt losses of $260,770.
When the case was called for trial on June 16, 2003,
petitioner presented for the first time various documents that
had been requested by respondent and ordered produced by the
Court’s order of May 6, 2003. He did not present any canceled
checks supporting the alleged bad debt losses. He presented
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purported third-party promissory notes dated December 28, 1998,
and January 7, 1999, referring to payment on December 31, 1999,
for “any and all” loans or moneys received during 1999, without
any specific amounts mentioned. Respondent had no opportunity to
contact the alleged obligors on the notes. The Court granted
respondent’s motion for sanctions and ordered that petitioner
would not be allowed to introduce into evidence documents that
had not been timely produced in accordance with the Standing
Pre-Trial Order or the order granting respondent’s motion to
compel production.
The case was recalled for trial on June 19, 2003, at which
time the parties filed a Stipulation of Facts resolving all
issues other than those set forth above. After several delays,
on December 15, 2003, petitioner filed an answering brief to
which he attached copies of canceled checks dated in 1999 that
purportedly support the bad debt expense claimed.
Discussion
Bad Debt Expense
In order to be eligible for a bad debt deduction for debts
that became worthless, petitioner must prove that a bona fide
debt existed and that the debt became worthless in the year in
which he claimed the deduction. Sec. 166(d); sec. 1.166-5(a)(2),
Income Tax Regs.
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The thrust of petitioner’s testimony is that he made loans
to virtual strangers over the course of 1999, through December
1999, pursuant to “promissory notes” that did not specify any
amounts due, in order to earn favorable interest. Petitioner
testified as follows:
in ‘97 and ‘98 and ‘99 I was actively involved in it
and when I found the market was going down I started
liquidating and fortunately I had the opportunity to
meet this group and I thought that rather than putting
my money in the bank making two percent or three
percent I had an opportunity that they would give me
six percent and I could therefore secure the fund for
myself.
Then later on if something panned out where they
went IPO or something else I might be able to have some
opportunity there. So I asked them to provide me a
promissory note which they did for ‘99 on the basis
that I would provide them the funds as they needed it
and as I had the available when I had already cashed
some of my stocks. * * *
Petitioner then claims that, in early 2000, he concluded that the
alleged “loans” were worthless.
Whether a bona fide debtor-creditor relationship exists is a
question of fact to be determined upon consideration of all of
the facts and circumstances. Fisher v. Commissioner, 54 T.C.
905, 909 (1970). Among the factors that are commonly considered
in deciding whether there was a reasonable expectation, belief,
and intention of repayment are: (1) Whether a note or other
evidence of indebtedness exists, Clark v. Commissioner, 18 T.C.
780, 783 (1952), affd. 205 F.2d 353 (2d Cir. 1953); (2) whether
interest is charged, id.; (3) whether there is a fixed schedule
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for repayments, id.; (4) whether any security or collateral is
requested, Zimmerman v. United States, 318 F.2d 611, 613 (9th
Cir. 1963); (5) whether a demand for repayment has been made,
Montgomery v. United States, 87 Ct. Cl. 218, 23 F. Supp. 130
(1938); (6) whether any repayments have been made, Estate of Ames
v. Commissioner, a Memorandum Opinion of this Court dated Feb. 7,
1946; and (7) whether the borrower was solvent at the time of the
loan, Jewell Ridge Coal Corp. v. Commissioner, 318 F.2d 695, 699
(4th Cir. 1963), affg. T.C. Memo. 1962-194. For reasons set
forth above, the belatedly tendered notes were not reliable and
were not received in evidence. There was no evidence offered
with respect to the other factors.
Respondent argues, and we agree, that it appears from
petitioner’s testimony that the funds advanced as claimed by
petitioner were investments, not bona fide loans. There was no
apparent investigation or evidence of the financial solvency of
the alleged borrowers or evidence that they intended to repay
petitioner for the advances. In addition, petitioner presented
no objective evidence that the advances became worthless by the
end of 1999. It is improbable that he would have continued to
lend money through December 1999 and that the advances
simultaneously became worthless.
Petitioner did not disclose to respondent or present any
information concerning the purported loans until the day of
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trial, thus precluding any reasonable investigation of events
that occurred 4 years earlier. Petitioner’s testimony at trial
was vague and conclusory, and he attempted to add additional
details only in his answering brief, after respondent pointed out
the defects in his case. Although he claimed at trial that he
had no money to employ counsel or a collection agency to pursue
collection, he asserted in his posttrial brief that he had
employed counsel and a collection agency. There is no evidence
or even suggestion as to the dates on which collection efforts
were pursued. The statements contained in petitioner’s answering
brief, of course, cannot be considered as evidence. Rule 143(b).
His inconsistent assertions are, however, an indication of the
unreliability of his testimony at trial. In any event, none of
the belated submissions would cure the gaps in petitioner’s
evidence with respect to the bona fides of the alleged loans, the
capacity and intent of the alleged debtors, or the worthlessness
of the alleged debts during the same year in which they were
allegedly created. Petitioner’s claims are improbable, and we
cannot accept them. Geiger v. Commissioner, 440 F.2d 688, 689
(9th Cir. 1971), affg. T.C. Memo. 1969-159.
Investment Interest Expense
Section 163 allows a deduction for interest paid during the
taxable year. Section 163(d), however, limits the amount of the
investment interest that is deductible by individual taxpayers to
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net investment income. Petitioner had net investment income of
$1,744 in 1999.
Under section 163(d)(4)(B), a taxpayer may elect to increase
net investment income by net capital gain from property held for
investment. The election, however, must be made on or before the
due date, including extensions, of the tax return for the year in
which the net capital gain is recognized. Sec. 1.163(d)-1,
Income Tax Regs. Because petitioner did not file a timely
return, he is not entitled to the election.
Petitioner has offered no evidence or argument with respect
to respondent’s disallowance of his claimed investment interest
expense. Respondent’s determination in this regard is sustained.
Section 6651(a)
Petitioner contends that he was not required to file a tax
return for 1999 because no tax was due. The stipulated amounts
of income that he received during that year, however, far exceed
the threshold requirements for individuals to file returns.
Respondent has carried the burden of production imposed by
section 7491(c). See Higbee v. Commissioner, 116 T.C. 438, 447
(2001). In order to avoid the penalty under section 6651(a),
petitioner must establish reasonable cause for his failure to
file. His purported belief, clearly mistaken, is not reasonable
cause. There is no indication that petitioner sought competent
professional advice with respect to his 1999 tax return. Even if
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he had, his delinquency would not necessarily be excused. See,
e.g., United States v. Boyle, 469 U.S. 241, 251-252 (1985); see
also Adams v. Commissioner, T.C. Memo. 1982-223, affd. without
published opinion 732 F.2d 159 (7th Cir. 1984). Petitioner did
not have reasonable cause for his failure to file his return on a
timely basis, and he is liable for the addition to tax under
section 6651(a)(1).
Failure To Exhaust Administrative Remedies
Section 6673(a) provides for a penalty, in an amount not in
excess of $25,000, whenever it appears to the Tax Court that
proceedings before it have been instituted or maintained by the
taxpayer primarily for delay or “the taxpayer unreasonably failed
to pursue available administrative remedies”. An award under
this section may be appropriate if a taxpayer fails to comply
with respondent’s request for records made prior to trial when,
had he produced those records when requested, there would have
been fewer disputed issues at the commencement of trial. See
Edwards v. Commissioner, T.C. Memo. 2002-169; and Edwards v.
Commissioner, T.C. Memo. 2003-149 ($24,000 penalty imposed where
the taxpayer took frivolous and groundless positions and
unreasonably failed to pursue available administrative remedies).
A sanction is also appropriate under section 6673 where a
taxpayer’s procrastination has increased the cost of litigation.
See Griest v. Commissioner, T.C. Memo. 1995-165 ($1,000 penalty
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awarded where a case was settled at the time of trial after the
taxpayer substantiated his basis to reduce sales proceeds
determined to be income).
The record in this case establishes repeated failures of
petitioner to meet with the IRS or respondent’s counsel and to
provide the information that ultimately led to the stipulation
and settlement of various items of income in this case. There
was no stipulation with respect to the claimed bad debt expenses
because petitioner did not raise them prior to trial, tendered
purported notes only the day of trial, and tendered copies of
canceled checks 6 months after trial as an attachment to his
answering brief. Petitioner’s failure to produce the documentary
materials was a violation of the Court’s Standing Pre-Trial Order
and the specific order of May 6, 2003, granting respondent’s
motion to compel production of documents. Petitioner’s only
explanation is that he was busy and that he did the same thing in
relation to a prior case that was settled with a determination
that he owed no additional taxes for 1994 and 1998. Petitioner’s
violation of the Court’s orders and Rules on a prior occasion,
however, is not an excuse for his repeating that conduct. The
record supports the inference that petitioner maintained this
action primarily for delay. In any event, the record is clear
that he unreasonably failed to pursue available administrative
remedies. The facts of this case are indistinguishable from
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those in Griest v. Commissioner, supra. Our decision will
require petitioner to pay to the United States a penalty of
$1,000.
To reflect the concessions by respondent and the foregoing,
An appropriate order and
decision will be entered
under Rule 155.