                            T.C. Memo. 1996-113



                          UNITED STATES TAX COURT



                      DENNIS R. SCHENK, Petitioner v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 21851-94.           Filed March 11, 1996.


        Dennis R. Schenk, pro se.


        Michelle Or, for respondent.


                            MEMORANDUM OPINION


        NAMEROFF, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1       Respondent determined a deficiency in petitioner's 1988

Federal income tax in the amount of $1,009, plus an addition to


        1
          All section references are to the Internal Revenue Code
in effect for the year at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                 - 2 -


tax under section 6651(a)(1) in the amount of $302.         The issues

for decision are:    (1) Whether petitioner is entitled to a

deduction for a nonbusiness bad debt under section 166; and (2)

whether petitioner is liable for the addition to tax under

section 6651(a)(1) for failure to timely file his income tax

return.

     At the time of the filing of this petition, petitioner

resided in Simi Valley, California.       The stipulation of facts and

attached documents are incorporated herein by this reference.

     In 1988, petitioner was a car salesman and lived in Garden

Grove, California.     Prior to and during 1988, petitioner and Roy

Maxted (Maxted) were good friends.       Petitioner and Maxted are

originally from Montana.    Petitioner was involved in a previous

business venture with Maxted and socialized with Maxted when he

visited Montana.    Petitioner kept in touch with Maxted through

periodic telephone calls and occasional visits.

     At the beginning of 1988, Maxted lived in Helena, Montana,

and made car shades.2    The car shades were made of an aluminum-

like material which was only produced on the east coast three to

four times per year.    The car shades also had suction cups so

that they could be fastened to the windshield.       Sometime in 1988,

Maxted relocated to Phoenix, Arizona, to continue his car shade

     2
          Car shades are placed inside a car to block sunlight
from coming through the windshield and heating the interior of
the car.
                                - 3 -


operation.    After Maxted's relocation, petitioner continued to

maintain telephone contact with him.    On several trips to

California, Maxted visited petitioner.

     Sometime before July 1988, Maxted telephoned petitioner and

invited him to visit Phoenix to see his car-shade operation.

During this conversation, Maxted indicated that he might need

financial assistance to continue making car shades.    Shortly

thereafter, petitioner went to Phoenix to visit Maxted's

operation.    Petitioner went to the shop where the car shades were

made and observed the construction of the car shades.    Petitioner

believed the car shades were constructed and packaged nicely.

     Petitioner advanced $10,000 to Maxted via a cashier's check

dated July 12, 1988.    Petitioner believed Maxted would use the

money to purchase a large quantity of the aluminum-like material

from the east coast suppliers to construct a large quantity of

car shades.    Petitioner believed he would be fully repaid from

the proceeds generated by sale of the car shades within 90 days.

Petitioner did not take a promissory note or ask for collateral

for the advance because he believed Maxted's word was good for

the loan.

     During the ensuing 90 days, Maxted advised petitioner that

he purchased the materials and that he was constructing the car

shades.   Maxted also informed petitioner that he had appointments

with K Mart and Pep Boys to show the car shades.    After several
                               - 4 -


conversations, Maxted informed petitioner that he was having

difficulty selling the car shades.     Maxted did not repay

petitioner within 90 days; however, he continued to advise

petitioner that he would repay the advance when the car shades

were sold.

     Within the first few months of 1989, petitioner could not

reach Maxted by telephone because the telephone line was

disconnected.   A month or two later, petitioner flew to Phoenix

and visited the shop where the car shades were made.     Someone at

the shop informed petitioner that Maxted had moved out and was

gone.   Petitioner did not continue to call or look for Maxted.

However, he occasionally inquired about Maxted's whereabouts from

Maxted's family in Montana and various acquaintances; however, no

one had any information about him.

     Petitioner signed his 1988 Federal income tax return on

February 11, 1992.   However, petitioner did not file the return

until August 19, 1992, because of various personal problems.

Petitioner did not apply for an extension to file his 1988

return.   On the Schedule D, Capital Gains and Losses, attached to

the return, petitioner reported a nonbusiness bad debt of

$10,000, resulting in a claimed short term capital loss of $3,000

for 1988 and a short term capital loss carryover to 1989 of

$7,000.
                                - 5 -


     Respondent contends that petitioner is not entitled to the

nonbusiness bad debt deduction because petitioner failed to

demonstrate that a bona fide debt existed between petitioner and

Maxted.    Further, assuming a bona fide debt existed, respondent

maintains that petitioner failed to show that the debt became

worthless in 1988.

Bad Debt

     Section 166(a) provides a deduction for any debt which

becomes worthless within the taxable year.   A nonbusiness bad

debt is considered a loss from the sale or exchange of a short

term capital asset.   Sec. 166(d)(1)(B).

     Only a bona fide debt qualifies under section 166(a).    Sec.

1.166-1(c), Income Tax Regs.   Section 1.166-1(c), Income Tax

Regs., defines a bona fide debt as "a debt which arises from a

debtor-creditor relationship based upon a valid and enforceable

obligation to pay a fixed or determinable sum of money."   The

existence of a bona fide debt is a factual inquiry that turns on

the facts and circumstances of the particular case, and the

taxpayer bears the burden of proving that a bona fide debt

existed.    Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493

(1980); Litton Business Sys., Inc. v. Commissioner, 61 T.C. 367,

377 (1973).    However, the ultimate question is whether there was

a genuine intention to create a debt, with a reasonable

expectation of repayment, and whether that intention comports
                                - 6 -


with the economic reality of creating a debtor-creditor

relationship.    Dixie Dairies Corp. v. Commissioner, supra at 494.

     The objective indicia of a bona fide debt include whether a

note or other evidence of indebtedness existed and whether

interest was charged.    See Clark v. Commissioner, 18 T.C. 780,

783 (1952), affd. 205 F.2d 353 (2d Cir. 1953).   Also considered

are the existence of security or collateral, the demand for

repayment, records that may reflect the transaction as a loan,

and the borrower's solvency at the time of the loan.   See Road

Materials, Inc. v. Commissioner, 407 F.2d 1121 (4th Cir. 1969),

affg. in part and vacating in part and remanding T.C. Memo. 1967-

187; Zimmerman v. United States, 318 F.2d 611, 613 (9th Cir.

1963).

     Petitioner and Maxted did not document their relationship

through the issuance of a promissory note.   In addition,

petitioner did not ask for collateral or security in exchange for

the $10,000.    However, the absence of formal indicia of debt is

not dispositive here.   Rather, the facts in the present case

indicate petitioner's intent to create a debt.   Specifically,

petitioner believed Maxted's word that he would repay the advance

because of a previous business relationship with him and their

Montana roots.   Further, petitioner visited Maxted's car-shade

operation, observed the construction and packaging of the car
                                - 7 -


shades, and knew how the advance was to be used.   Thus, we

believe petitioner genuinely intended to create a debt.

     In addition, we believe there was a reasonable expectation

of repayment.   When petitioner advanced the funds to Maxted, he

expected to be fully repaid within 90 days.   By that time,

petitioner believed the car shades would be constructed and sold.

Moreover, prior to advancing the funds, petitioner visited

Maxted's operation to observe the construction and packaging of

the car shades.   Petitioner advanced the funds specifically so

that Maxted could purchase enough material to construct a large

quantity of car shades.   Thus, petitioner could have reasonably

concluded that Maxted would be financially capable of repaying

the advance from the sale of these car shades.   Indeed, Maxted

advised petitioner numerous times that the advance would be

repaid once the car shades were sold.    In light of the evidence

presented, we conclude that the obligation of Maxted to

petitioner did constitute a bona fide debt under section 166.

     A bad debt is deductible only in the year it becomes

worthless.    Denver & R. G. W. R. Co. v. Commissioner, 32 T.C. 43,

56 (1959), affd. 279 F.2d 368 (10th Cir. 1960); Feinstein v.

Commissioner, 24 T.C. 656, 658 (1955).    Petitioner has the burden

of proving that the debt became worthless during the year in

question.    Rule 142(a); Estate of Mann v. United States, 731 F.2d

267, 275 (5th Cir. 1984); James A. Messer Co. v. Commissioner, 57
                                - 8 -


T.C. 848, 861 (1972).    When or whether a debt became worthless is

a question of fact, the answer to which lies in an examination of

all the circumstances.    Boehm v. Commissioner, 326 U.S. 287, 293

(1945); Estate of Mann v. United States, supra at 275; Dallmeyer

v. Commissioner, 14 T.C. 1282, 1291 (1950).    The taxpayer must

show some identifiable event that proves worthlessness in the

year claimed.   United States v. S.S. White Dental Manufacturing

Co., 274 U.S. 398, 401 (1927); Dallmeyer v. Commissioner, supra

at 1291-1292.   There is no standard test or formula for

determining worthlessness within a given taxable year; the

determination depends upon the particular facts and circumstances

of the case.    Lucas v. American Code Co., 280 U.S. 445, 449

(1930); Crown v. Commissioner, 77 T.C. 582, 598 (1981); Dallmeyer

v. Commissioner, supra at 1291.

     Based on the record, we find that petitioner has failed to

establish that the debt became worthless in 1988.   Petitioner

advanced the funds to Maxted on July 12, 1988, and was not repaid

within 90 days; i.e., by October 10, 1988.    However, petitioner

continued telephone discussions with Maxted over the next several

months.   When Maxted's telephone line was disconnected and

petitioner visited the shop in Phoenix in early 1989, petitioner

realized he would not get his money from Maxted.    On balance, we

find a lack of proof that the debt became worthless in 1988.
                               - 9 -


Accordingly, petitioner is not entitled to a short term capital

loss in 1988.

Section 6651

     Section 6651(a)(1) imposes an addition to tax for failure to

timely file a tax return unless it is shown that such failure was

due to reasonable cause and not willful neglect.   It is

petitioner's burden to show that he filed his return timely or

that reasonable cause existed for his failure to timely file his

return.   Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933);

Haden v. Commissioner, T.C. Memo. 1986-539; Carlin v.

Commissioner, T.C. Memo. 1981-694.

     Petitioner did not file his return until 1992 because of

personal problems which he did not describe.   There is no

evidence that petitioner's failure to file his return was due to

reasonable cause and not willful neglect.   Accordingly, we

sustain respondent on this issue.


                                               Decision will be

                                         entered for respondent.
