Gleason v. Commissioner, Docket No. 9242-90.
| Decision Date | 26 August 1991 |
| Docket Number | Docket No. 9242-90. |
| Citation | 62 T.C.M. 600 |
| Parties | Edgar H. Gleason, Jr. and Elizabeth Q. Gleason v. Commissioner. |
| Court | U.S. Tax Court |
Edgar H. Gleason, pro se. James F. Prothro and Emile L. Hebert III, for the respondent.
Memorandum Findings of Fact and Opinion
In this case we decide whether petitioner is entitled to a $33,000 bad debt deduction and an additional $1,074 deduction for automobile expenses.
Respondent determined a deficiency of $4,028.80 in petitioners' income tax for taxable year 1981. Respondent did not determine any additions to tax.
The 1981 deficiency resulted because respondent determined that petitioners' net operating loss carryback from 1984 to 1981 should be reduced from $20,432 to $12,874. That resulted from respondent's determination that petitioners' 1984 Federal income tax return was in error for several reasons.
Respondent determined that petitioners failed to report $604 of dividend income, and $608 of director's fees. Respondent conceded these two issues at trial.
Respondent also determined that petitioners improperly claimed a $4,519 bad debt deduction for several debts and improperly deducted $1,559 for depreciation for their automobiles. Petitioner conceded these two issues at trial.
After concessions, two issues remain for decision:
(1) Whether petitioners are entitled to a business bad debt deduction under section 166 relating to a $33,000 promissory note by Vernon Chester Moore, Jr., and Elizabeth Ann Canady Moore as wholly worthless in 1984. We hold they are.
(2) Whether petitioners are entitled to deduct an additional $1,074 of automobile and truck expenses for 1984 under section 162. We hold they are not.
All references to petitioner in the singular are to Edgar H. Gleason, Jr. All section references are to the Internal Revenue Code as amended and in effect for 1984. All Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found.
Petitioners resided in Shreveport, Louisiana, when the petition was filed.
During 1981 petitioner owned and operated a petroleum products distributorship called Gleason Exxon. He sold petroleum products to petroleum retailers. In 1981, he reported $3,658,369 in gross sales, and deducted $3,190,905 as cost of goods sold for a gross profit of $467,464. He also owned a service station in Belcher, Louisiana, which he leased to an operator. He sold both the bulk fuels business and the service station on September 1, 1981.
Mr. Jimmy Ray Harkness managed petitioner's petroleum products distributorship in 1981. He knew of petitioner's business relationship with Mr. Moore, the magnitude of sales to Mr. Moore, and the magnitude of the Moore debt.
Petitioner also engaged in real estate activities, including sales, appraisals, and management in 1984.
One of the retailers to whom petitioner sold petroleum products in 1981 was Vernon Chester Moore, Jr. (Mr. Moore). Mr. Moore operated a convenience store in Lynn Park off Lynnwood Avenue in the Shreveport area where he sold retail gasoline. He later operated the Belcher Exxon service station, a convenience store and gasoline service station, which he leased from petitioner until petitioner sold it. Mr. Moore accumulated part of the debt at the Lynn Park store as well as the Belcher Exxon station.
Mr. Moore was married to Elizabeth Ann Canady Moore (Mrs. Moore) during 1981 and for several years thereafter. They had two children about 13 and 15 years old in 1984. Mrs. Moore did not participate in Mr. Moore's business.
Mr. Moore purchased significant amounts of petroleum products from petitioner in 1981, primarily gasoline tanker loads. A typical load of gasoline cost more than $10,000 in that area of the country in 1981. The sale of tanker loads was not made on consignment. Mr. Moore did not pay currently for all of the products that he purchased, and his indebtedness to petitioner grew to be $33,000. Petitioner's only indebtedness from the Moores related to Mr. Moore's purchase of petroleum products from petitioner.
As part of his attempts to obtain payment from Mr. Moore, petitioner arranged for the Moores to sign a promissory note to pay $33,000 to Gleason Exxon, thus to petitioner. The note provided for consecutive monthly installments of $199.98 beginning on October 10, 1981, until principal and interest were paid in full. Interest was 4 percent per annum. The Moores signed the note on August 31, 1981. The note was notarized by Robert B. Wyche.
Petitioner purchased retail gasoline from Mr. Moore for petitioner's vehicles. Mr. Moore was given credit for the $199.98 monthly payments by offsetting amounts owed by petitioner to Mr. Moore for his retail gasoline purchases. Such credits or actual payments were made for each month from October 2, 1981, to November 1, 1983. Payments and credits totaled $5,199.48.
Somewhere around 1983 the Moores initiated a bankruptcy proceeding in the United States Bankruptcy Court for the Western District of Louisiana.
Around late 1983 or early 1984, Mr. Moore left his wife and children and that area of Louisiana. Mr. Moore remained listed as a party to the bankruptcy, but he made no effort to help Mrs. Moore pay creditors.
Around November 1983, Mrs. Moore approached petitioner to see if he would help her get approval of her bankruptcy plan. Petitioner believed that Mrs. Moore could not pay any significant amount on the note. To accommodate her, he agreed to reduce the claim in bankruptcy to $1,600. However, he had no intention of simply forgiving the debt.
On December 8, 1983, the Moores' bankruptcy counsel, Mr. Edmund M. Thomas, wrote to petitioner to outline a proposal relating to payment of the Moores' debt to petitioner. On January 27, 1984, Mr. Thomas wrote to petitioner and stated: "This is just to verify the fact that the total amount owed is $1,600.00, and that after Beth pays 32 monthly installments of $50.00 each, the account will be paid in full."
On July 10, 1984, Mr. Thomas filed an amendment to the Moores' wage earner's plan, under the supervision of the bankruptcy court, to include the now $1,600 debt, and to raise the monthly payment from $485.99 to $535.99. Petitioner believed that the amended plan applied strictly to Mrs. Moore, and had nothing to do with Mr. Moore.
Mrs. Moore apparently did not ever make that increase in her monthly payment. She did pay $482.52 per month to the trustee in bankruptcy for a while. Petitioner never received any of that money. He never received any more in payment on the debt. Mrs. Moore was later discharged from her duty to pay the monthly amount.
Mr. Moore did not return to the Shreveport area, and Mrs. Moore has remarried. Her new married name is Mrs. Belk.
Petitioners' returns were prepared by Rayeburn G. Cook, a certified public accountant. Petitioner did not claim a bad debt deduction on his 1984 return or for any other year based on the $33,000 note from the Moores. Petitioner did deduct several smaller bad debts on his 1984 return that were maintained on petitioner's statement cards. Petitioner kept the statement cards in a different location than his records concerning the $33,000 note from the Moores. Petitioners claimed $19,219 as a bad debt deduction on Schedule C of their 1984 return.
Respondent's notice of deficiency provides, as to this issue:
No allowance has been made regarding Vernon Moore because you have not verified any amount nor the date it would be considered a bad debt. $1,600 was added to the debtor's bankruptcy in July, 1984. This bankruptcy case was closed in 1985.
Petitioners had four vehicles in 1984: a 1978 station wagon, a van, a car for petitioner's wife, and a car for petitioner's son. Petitioner used his vehicle, the 1978 station wagon, largely for business, such as his real estate activities. He kept signs and tools in this vehicle.
Petitioner claimed $4,093 in car and truck expenses on Schedule C, Profit (or Loss) from Business or Profession for his sales agent sole proprietorship. Respondent determined that this amount should be reduced by $1,074, and that the amount allowed should be $3,019.
OpinionPetitioners deducted the Moore debt as a business bad debt under section 166(a)(1). Section 166(a)(1) allows as a deduction any debt that becomes wholly worthless within the taxable year.
Respondent's determination is presumed correct and the burden of proof is on petitioner. Rule 142(a). Petitioners must first prove that the debt in question is bona fide in that it arose from a debtor-creditor relationship based on a valid and enforceable obligation to pay a determinable sum of money. Adelson v. United States [84-2 USTC ¶ 9599], 737 F.2d 1569 (Fed. Cir. 1984); Meyer v. Commissioner [77-1 USTC ¶ 9252], 547 F.2d 943, 946 (5th Cir. 1977) citing Iowa Southern Utilities Co. v. United States [65-2 USTC ¶ 9565], 172 Ct. Cl. 21, 348 F.2d 492, 497 (1965); Continental Bankers Life Insurance Co. of the South v. Commissioner [Dec. 45,829], 93 T.C. 52, 66 (1989); Holderness v. Commissioner [Dec. 41,464(M)], T.C. Memo. 1977-5, affd. per curiam [80-1 USTC ¶ 9267] 615 F.2d 401 (6th Cir. 1980); § 1.166-1(c), Income Tax Regs.
Respondent argues that petitioner is not entitled to the bad debt deduction on the grounds that the debt is not bona fide and that petitioner did not substantiate the amount. In a closely related theory, respondent also asserts that petitioner has not shown that the debt was a business debt as opposed to a personal debt.
We believe the debt to be bona fide and business related. Petitioner sold a significant amount of petroleum products to Mr. Moore. He had no other financial dealings with Mr. Moore. Mr. Moore's debt grew quite large. The record contains a notarized promissory note signed by Mr. and Mrs....
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