Stirling v. Commissioner, Docket No. 21090-93.
| Decision Date | 13 March 1995 |
| Docket Number | Docket No. 21090-93. |
| Citation | 69 T.C.M. 2065 |
| Parties | Richard Edward Stirling v. Commissioner. |
| Court | U.S. Tax Court |
This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182.1
Respondent determined a deficiency of $7,166 in petitioner's 1990 Federal income tax and a penalty pursuant to section 6662(a) in the amount of $1,433.
After concessions,2 the issues for decision with respect to petitioner's 1990 Federal income tax are: (1) Whether petitioner's exhibit 30 is admissible into evidence; (2) whether petitioner is entitled to a nonbusiness bad debt deduction with respect to funds he advanced to Tina Harris; (3) whether petitioner is entitled to a business bad debt deduction for funds he allegedly advanced to and expended for Highlander Graphics;3 (4) if petitioner is not entitled to a business bad debt deduction, whether he is entitled to a capital loss with respect to Highlander Graphics; (5) whether petitioner is entitled to a moving expense deduction in excess of $4,172; and (6) whether petitioner is liable for the accuracy-related penalty for negligence under section 6662.
Some of the facts have been stipulated and are so found. Petitioner resided in Raleigh, North Carolina, when his petition was filed. During all times relevant to this case, petitioner was employed on a full-time basis as an engineer by Carolina Power and Light Company, Incorporated (Carolina Power).
In April of 1987, petitioner and Ronald Gray (Gray) entered into a venture to produce and sell silk screened T-shirts. The venture was called Highlander Graphics (Highlander). Pursuant to an oral agreement, petitioner was to provide funds to purchase silk screening equipment, supplies, and other items necessary to start the business, and Gray was to produce and sell the finished product. The agreement provided that any profit was to be divided equally between petitioner and Gray. The risk of any losses was borne by petitioner.
On June 26, 1987, petitioner and Gray opened a checking account in Highlander's name. Petitioner, petitioner's mother, Gray, and Gray's wife were signatories on the account.
In 1987, petitioner rented business property, initiated utility service, and obtained various permits required for Highlander's operation. He also advanced funds directly to Highlander, expended funds to purchase silk screening equipment for Highlander, and paid for some of Highlander's supplies and utility bills. The equipment ultimately was returned to petitioner. In addition, in 1987 petitioner's mother, Jane Stirling, and petitioner's brother, Kent Stirling, advanced funds to Highlander. Kent Stirling wired $5,000 from his checking account directly into the Highlander checking account.
Around August or September of 1987, a disagreement arose between petitioner and Gray and amicable relations terminated. At that time, the art work, sales lists, and checkbook were not on the Highlander premises. Following the disagreement, petitioner no longer had ready access to the premises of Highlander.
In September or October of 1987, Gray and Kim Blevins, the silkscreen artist for Highlander, incorporated the business under the name Highlander Graphics, Inc. (the corporation).
After petitioner's disagreement with Gray, petitioner negotiated with Gray and the corporation in an attempt to resolve the conflicts concerning Highlander. The negotiations failed. Thereafter, petitioner and his mother instituted an action in the General Court of Justice, Superior Court Division, Wake County, North Carolina, against Gray and the corporation. In a signed affidavit (the affidavit) filed with respect to that suit petitioner attested that he was entitled to the following amounts from Gray and the corporation: (1) Loan proceeds in the amount of $11,000; (2) equipment rental in the amount of $7,000; (3) salary owed in the amount of $2,500; (4) expenditures for the benefit of Gray and Highlander made by check totaling $10,139.27; and (5) cash expenditures in the amount of $2,714.70.
On April 7, 1989, the Superior Court of North Carolina entered a default judgment in favor of petitioner and his mother and awarded treble damages for unfair and deceptive trade practices. Petitioner attempted to retain counsel to aid him in collecting on the default judgment, but in a letter dated June 7, 1989, an attorney that he approached declined to represent petitioner and his mother on a contingency basis because "the chances of recovery did not support the substantial amount of work that would be involved." A deputy sheriff of Wake County, North Carolina, attempted to execute upon the judgment during the period of July 12, 1989, through October 11, 1989, but indicated on the writ of execution that he could not locate Gray or any property upon which to levy.
A rent check to petitioner from Randy Rankins, dated October 20, 1988, in the amount of $338 was returned for insufficient funds. By letter dated February 14, 1989, petitioner demanded payment from Randy Rankins and indicated that if Randy Rankins did not pay petitioner, petitioner would file suit to collect the money. There is no evidence that Randy Rankins was unable to pay petitioner $338 in 1988, 1989, or 1990.
In 1987, petitioner loaned Tina Harris $1,700.
In 1990, Carolina Power transferred petitioner from Raleigh, North Carolina, to Hartesville, South Carolina. Carolina Power paid the moving company that petitioner employed for his move. Carolina Power reimbursed petitioner $4,172 for the move, and petitioner included this amount in his gross income.
On his 1990 Federal income tax return, petitioner claimed a Schedule C business bad debt deduction in the amount of $28,525 and a Schedule A moving expense deduction in the amount of $6,067.77. Respondent disallowed petitioner's claimed business bad debt deduction and moving expense deduction because of lack of substantiation. In addition, respondent determined that petitioner was liable for the accuracy-related penalty for negligence in the amount of $1,433.
OpinionAt trial, petitioner offered into evidence as exhibit 30 a copy of a newspaper legal notice of an action instituted in the General Court of Justice, District Court Division, Union County, North Carolina, Jane Stirling v. Tina Harris, No. 88 CVD 0221 (Aug. 25, 1988). Respondent objects to the admissibility of exhibit 30 on the grounds of relevance. This Court reserved ruling upon the admissibility of exhibit 30 until the filing of all briefs in order to allow petitioner an opportunity to show the relevancy of exhibit 30. Petitioner failed to address the issue on brief. Evidence is relevant if it has "any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed. R. Evid. 401. Since we do not see the relevance of exhibit 30 to the instant case under this standard, we hold that exhibit 30 is inadmissible, and we have not considered it in our resolution of the disputes in this case.
As to the substantive issues before us, petitioner contends he is entitled to a business bad debt deduction in the amount $28,525, a nonbusiness bad debt in the amount of $1,700, and a moving expense deduction in the amount of $6,067.77 with respect to his 1990 Federal income tax. Respondent argues that petitioner is not entitled to any bad debt deduction and that petitioner is not entitled to a moving expense deduction in excess of $4,172.
Deductions are strictly a matter of legislative grace, and petitioner bears the burden of proving his entitlement to any deduction claimed on the return. INDOPCO, Inc. v. Commissioner [92-1 USTC ¶ 50,113], 503 U.S. 79 (1992); New Colonial Ice Co. v. Helvering [4 USTC ¶ 1292], 292 U.S. 435, 440 (1934).
In general, section 166(a) allows an individual to deduct losses sustained from bad debts which become worthless during the taxable year. Only a bona fide debt, arising from a "debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money" qualifies for a deduction under section 166. Sec. 1.166-1(c), Income Tax Regs.
Losses sustained from business bad debts are treated differently from those sustained as nonbusiness bad debts. Sec. 166(d); sec. 1.166-5, Income Tax Regs. Business bad debts are allowable as deductions against ordinary income, whereas nonbusiness bad debts are deductible in the same manner as short-term capital losses. Sec. 166(d).
Petitioner contends that he is entitled to a nonbusiness bad debt with respect to $1,700 advanced to Tina Harris during 1987. Petitioner did not introduce any persuasive evidence of the worthlessness of the loans to Tina Harris or the date such loans allegedly became worthless. Petitioner has failed to show that he is entitled to a nonbusiness bad debt deduction in 1990 with respect to the funds advanced to Tina Harris. See sec. 166(a).
Petitioner contends that he is entitled to a business bad debt deduction in the amount of $28,525 on his 1990 Federal income tax return for amounts he expended with respect to Highlander during 1987. Respondent contends that petitioner has not demonstrated that the alleged advances to Highlander and expenditures for Highlander's benefit were in fact loans or the amounts of any such advances and expenditures.
We agree with respondent that petitioner has not shown that the funds advanced to Highlander and Gray were bona fide debts and conclude that they were an equity investment.
Advances which are capital contributions do not give rise to any bad debt deduction. Raymond v. United States [75-1 USTC ¶ 9289], 511 F.2d 185, 189 (6th Cir. 1975); Estate of Dunn v. Commissioner [Dec. 46,767(M)], T.C. Memo....
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