                         T.C. Memo. 1999-40



                       UNITED STATES TAX COURT



 MYER B. BARR AND ESTATE OF DIANA L. BARR, DECEASED, WILLIAM M.
    MARCUS, RONNIE S. TRAYNOR AND MARIE L. COTTON, PERSONAL
                 REPRESENTATIVES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17491-97.              Filed February 8, 1999.



     Donald F. Mintmire, for petitioners.

     Alison W. Lehr, for respondent.



                         MEMORANDUM OPINION


     PARR, Judge:    Respondent determined a deficiency in

petitioners' Federal income tax for the taxable year 1993 in the

amount of $30,720.
                                - 2 -


     All section references are to the Internal Revenue Code in

effect for the taxable year in issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.    References to petitioner are to Myer B.

Barr.

     The issues for decision are:    (1) Whether for 1993

petitioners are entitled to a $100,000 nonbusiness bad debt

deduction related to a transaction with Super City Meats, Inc.

(Super City Meats).    We hold they are.   (2) Whether for 1993

petitioners are entitled to charitable contribution deductions in

excess of the amount allowed by respondent.     We hold they are to

the extent set forth below.

     Some of the facts have been stipulated and are so found.

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.     At the time the petition

in this case was filed, petitioner resided in Palm Beach,

Florida.

     For convenience, we combine our findings of fact with our

opinion under each separate issue heading.1

Issue 1.   Bad Debt

     Respondent determined that for 1993 petitioners were not

entitled to a $100,000 nonbusiness bad debt deduction related to

a transaction with Super City Meats.

     1
          We have considered each of the parties' arguments and,
to the extent that they are not discussed herein, find them to be
unconvincing.
                                 - 3 -


     Section 166 entitles a taxpayer to a deduction for a bad

debt that becomes worthless during the taxable year.    A business

bad debt can be deducted from ordinary income if it is either

partially or totally worthless.    Sec. 166(a).   A nonbusiness bad

debt, however, is treated as a short-term capital loss.    Sec.

166(d).   Petitioners bear the burden of proving that a bona fide

debt exists and that the debt became worthless during the taxable

year in issue.    Rule 142(a).

     Petitioner has two sons, Jeffrey Barr (Jeffrey) and Stephen

Barr (Stephen).    Petitioner has a close relationship with

Jeffrey; however, he is estranged from Stephen for personal

reasons and maintains no contact with him.

     Super City Meats, of which Stephen was president and 50

percent co-owner, sold products to various Chinese restaurants.

On September 13, 1990, Jeffrey advanced Stephen $100,000.     The

purpose of this advance was to provide working capital for Super

City Meats.   The advance was to be used to interview and hire a

new manager, pay off debts to a former supplier, and make

purchases from new suppliers.

     A promissory note (the note) in the amount of $100,000 was

executed by Stephen personally and as president of Super City

Meats to Jeffrey several days after the advance, but it was dated

September 13, 1990.    Jeffrey required Stephen to sign the note

personally as an added assurance of repayment.    The note bore

interest at 13 percent per annum.
                                - 4 -


     Jeffrey expected that he would be repaid in approximately 18

months.    The repayment was to be made from certain insurance

proceeds that Super City Meats was to receive.     The insurance

proceeds were from policies on Stephen's business partner, the

executive manager and other 50 percent co-owner of Super City

Meats, who had been murdered on the business premises in July of

1990.    During that time, Super City Meats was also having

problems with sales and collecting receivables due to alleged

pressure from the Chinese mafia.    When Jeffrey advanced Stephen

the $100,000, he was aware that Stephen's business partner had

been murdered.

     Petitioner is a graduate of the University of Pennsylvania

and Harvard Law School.    At that time, petitioner was retired and

invested in various fields, especially mutual bond funds.      On

February 28, 1991, petitioner and Jeffrey executed an agreement

where Jeffery transferred to petitioner his rights created under

the note for $100,000.2   Petitioner testified that he acquired

the note because he considered it a good investment.     Petitioner

testified that at that time his investments paid between 7 and 9

percent interest, and the original 13 percent interest on the

note was an attractive investment.      On their 1993 Federal income

tax return, petitioners reported taxable interest of $73,672 and

tax-exempt interest of $207,628.    In addition, petitioners


     2
          Petitioners' 1993 Federal income tax return, however,
indicates an acquisition date of Sept. 13, 1990.
                               - 5 -


reported $1,093,778 of capital gains on their 1993 Federal income

tax return.

     When petitioner purchased the note, he did not consult with

any advisers or perform any independent research regarding Super

City Meats.   Furthermore, when petitioner purchased the note, he

had no knowledge of the murder of Stephen's business partner or

the alleged problems with the Chinese mafia.    Jeffrey continued

to manage the note, and Stephen was not informed that petitioner

had purchased it.

     In February 1992, Stephen was indicted for the July 1990

murder of his business partner.   The indictment against Stephen

was not dismissed until August of 1993.    As a consequence of

defending himself against the criminal indictment, Stephen

"didn't have a dime."   In 1993, Stephen was unemployed, he and

his wife were provided living expenses by his mother-in-law, and

he carried in excess of $100,000 of credit card debt.

     The insurance companies refused to pay on the policies of

Stephen's murdered business partner.    The insurance proceeds were

never paid to Super City Meats or any of its representatives.

     On September 30, 1993, Stephen acknowledged in a letter to

Jeffrey that he did not have the current ability to repay the

advance and the required interest.     On October 11, 1993, Stephen

further acknowledged in a letter to Jeffrey that it was unlikely

he would ever have the resources to repay the debt.

     On their 1993 Federal income tax return, petitioners claimed

a nonbusiness bad debt deduction of $100,000.    The burden of
                                - 6 -


proof is on petitioners to show that the transaction at issue was

a bona fide loan.   Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).   We always examine intrafamily transactions with

special scrutiny.   Caligiuri v. Commissioner, 549 F.2d 1155, 1157

(8th Cir. 1977), affg. T.C. Memo. 1975-319; Perry v.

Commissioner, 92 T.C. 470, 481 (1989), affd. without published

opinion 912 F.2d 1466 (5th Cir. 1990); Bragg v. Commissioner,

T.C. Memo. 1993-479.   The presumption is that a transfer between

family members is a gift.    Perry v. Commissioner, supra at 481;

Estate of Reynolds v. Commissioner, 55 T.C. 172, 201 (1970).

This presumption may be rebutted by an affirmative showing that

there existed a real expectation of repayment and intent to

enforce the collection of the indebtedness.    Estate of Van Anda

v. Commissioner, 12 T.C. 1158, 1162 (1949), affd. per curiam 192

F.2d 391 (2d Cir. 1951).    A mere declaration of intent by the

taxpayer is insufficient if the transaction fails to exhibit more

reliable indicia of debt.    See Williams v. Commissioner, 627 F.2d

1032, 1034 (10th Cir. 1980), affg. T.C. Memo. 1978-306; Alterman

Foods, Inc. v. United States, 505 F.2d 873, 877 (5th Cir. 1974).

     The determination of whether a transfer was made with a real

expectation of repayment and an intention to enforce the debt

depends on all the facts and circumstances including whether: (1)

There was a promissory note or other evidence of indebtedness;

(2) interest was charged; (3) there was a fixed schedule for

repayment; (4) security or collateral was requested; (5) a demand

for repayment was made; (6) the parties' records, if any, reflect
                                - 7 -


the transaction as a loan; (7) any repayments have been made; and

(8) the borrower was solvent at the time of the loan.    See Hunt

v. Commissioner, T.C. Memo. 1989-335; see also Zimmerman v.

United States, 318 F.2d 611, 613 (9th Cir. 1963); Estate of

Maxwell v. Commissioner, 98 T.C. 594, 604 (1992), affd. 3 F.3d

591 (2d Cir. 1993); Estate of Kelley v. Commissioner, 63 T.C.

321, 323-324 (1974); Rude v. Commissioner, 48 T.C. 165, 173

(1967); Clark v. Commissioner, 18 T.C. 780, 783 (1952), affd. per

curiam 205 F.2d 353 (2d Cir. 1953); Bragg v. Commissioner, supra.

The factors are not exclusive, and no one factor controls.

Rather, our evaluation of the various factors provides us with an

evidentiary basis upon which we make our ultimate factual

determination of whether a bona fide indebtedness existed.    See

Litton Bus. Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973).

     With those factors in mind, we turn to the facts and

circumstances surrounding the transaction to determine whether a

bona fide debtor-creditor relationship was created.

     1.   Promissory Note or Other Evidence of Indebtedness

     Petitioners introduced a promissory note to Jeffrey, signed

by Stephen, for $100,000.    Petitioners also introduced an

agreement between petitioner and Jeffrey whereby petitioner

purchased the note for $100,000.

     2.   Interest

     The note executed by Stephen to Jeffrey stated that interest

would be paid at the rate of 13 percent per annum on the unpaid

principal amount.    At some time after petitioner acquired the
                               - 8 -


note, Stephen and Jeffrey lowered the interest rate to 10

percent.

     Jeffrey testified that from the time the note was executed

on September 13, 1990, until it was transferred to petitioner on

February 28, 1991, Stephen made timely monthly interest payments

on the note.   Jeffrey, however, did not report any interest

income from Stephen on his 1990 and 1991 Federal income tax

returns.

     After the note was transferred to petitioner, Jeffrey

continued to collect interest payments.   Jeffrey testified that

interest was paid on the note until approximately September 1992.

At that time, Stephen informed Jeffrey that he was struggling and

having trouble collecting his accounts receivable, and that he

would no longer be able to make interest payments on the note.

     On his 1992 Federal income tax return, petitioner reported

interest from Stephen in the amount of $2,100, which is

substantially less than the note provided.   Petitioner allowed

Jeffrey to keep any interest payments in excess of the $2,100.

On two occasions Jeffrey, his wife, and their children visited

petitioner in Florida.   During these trips, Jeffrey and his

family incurred expenses for airfare, hotel accommodations,

renting a car, and other travel related expenses.   Petitioner

told Jeffrey to keep the interest payments as reimbursement for

whatever travel expenses he incurred.
                                 - 9 -


     3.   Fixed Schedule for Repayment

     The note did not have a fixed schedule for repayment and had

no fixed maturity date.

     4.   Security or Collateral

     No security or collateral was requested.

     5.   Demand for Repayment

     A formal demand for payment was made by Jeffrey, on behalf

of petitioner, in a letter to Stephen dated August 7, 1993.

Jeffrey also wrote letters to counsel for Super City Meats

seeking payment on the note.

     6.   Records of the Loans

     The parties' personal records reflect the transaction as a

loan.

     7.   Actual Repayments

     The record indicates that some interest payments were made.

     8.   Solvency of the borrower

     Both Super City Meats and Stephen were solvent at the time

of the loan.

     We believe that when Jeffrey made the advance to Stephen, he

had a real expectation that he would be repaid.   He knew that

Super City Meats was the beneficiary of life insurance on

Stephen's co-owner, and he fully expected to be repaid from the

insurance proceeds.   By lending $100,000 to his brother, Jeffrey

placed himself in a precarious personal and financial situation.

First, Jeffrey testified that he did not have that type of money

in his checking account and had to borrow against his securities
                                - 10 -


account at 10 to 12 percent interest.      Second, Jeffrey also

testified that his wife was furious when he told her about the

loan.     Third, at that time, Jeffrey had left his job at Citibank

where he had been employed for 17 years.      He had gone to work for

a small consulting firm and stated that "the first day I joined

them, I knew that it was a big mistake."      Jeffrey's wife had also

taken a leave of absence from her job due to pregnancy.

Jeffrey's financial situation did not allow him to make the

advance without the expectation of repayment.      A bona fide loan

existed between Jeffrey and Stephen.

     When petitioner purchased the note, he stepped into

Jeffrey's shoes as the creditor and was entitled to the same

rights created under the note.     See, e.g., First Union Natl. Bank

of Florida v. Hall, 123 F.3d 1374 (11th Cir. 1997); Underhill v.

Commissioner, 45 T.C. 489 (1966).       A bona fide loan existed

between petitioner and Stephen, and we believe that petitioner

shared Jeffrey's expectation of repayment.      Furthermore, we had

an opportunity to observe petitioner's demeanor at trial and we

find him to be credible.     Accordingly, petitioners are entitled

to the $100,000 nonbusiness bad debt deduction for 1993.

Issue 2.     Charitable Contributions

        Respondent determined that for 1993 petitioners were not

entitled to certain deductions for charitable contributions.

        We begin by noting that, as a general rule, the

Commissioner's determinations are presumed correct, and the

taxpayer bears the burden of proving otherwise.      Rule 142(a);
                              - 11 -


Welch v. Helvering, 290 U.S. 111, 115 (1933).    Moreover,

deductions are strictly a matter of legislative grace, and the

taxpayer has the burden of establishing entitlement to any

deduction claimed on the return.   Deputy v. duPont, 308 U.S. 488,

493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).

     The taxpayer's burden of establishing his entitlement to a

deduction includes the burden of substantiation.    Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).   The Court is not bound to accept

unverified, undocumented testimony of the taxpayer.    Id.

Accordingly, section 6001 and the regulations promulgated

thereunder require the taxpayer to maintain records sufficient to

enable the Commissioner to determine the taxpayer's correct tax

liability.   Meneguzzo v. Commissioner, 43 T.C. 824, 831-832

(1965); sec. 1.6001-1(a), Income Tax Regs.

     Petitioners claimed $7,603 of charitable contributions by

cash or check on their 1993 Federal income tax return.

Petitioners substantiated cash and check contributions in the

amount of $4,051, and respondent disallowed the remaining $3,552.

Petitioners have failed to meet their burden regarding the

disallowed contributions by cash or check.   Accordingly,

respondent's disallowance of the charitable contributions by cash

or check in the amount of $3,552 is sustained.

     Petitioners also claimed $20,138 of charitable contributions

other than by cash or check on their 1993 Federal income tax
                               - 12 -


return.   Respondent allowed $14,224 of the charitable

contributions other than by cash or check.     If a taxpayer claims

a deduction for a charitable contribution of property other than

money, the amount of the contribution is the fair market value of

the property at the time of the contribution reduced as provided

in section 170 and the regulations promulgated thereunder.    Sec.

1.170A-1(c)(1), Income Tax Regs.    The fair market value is the

price at which the property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to

buy or sell and both having reasonable knowledge of relevant

facts.    Sec. 1.170A-1(c)(2), Income Tax Regs.

     In light of some confusion at trial and on brief, and to

remedy certain computational errors in the stipulation of facts,

we set forth the allowable contributions other than by cash or

check below.   Respondent allowed the following amounts for

noncash charitable contributions:

                                     Claimed       Allowed
     Morse Geriatric1                $1,342           $413
     New Eyes for the Needy             585            100
     Hadassah Bargain Spot            1,426            507
     Animal Rescue League             1,526            -0-
     Science Museum                     250            -0-
     Lions SightFirst                    90            -0-
     Municipal Library                  450             64
     Jewish Federation               12,581         12,581
     JCC Thrift Store                 1,783            507
     Brandeis University                105             52
                                    $20,138        $14,224
     1
      We note that the full name of this institution is the
Nearly New Thrift Shop of the Morse Geriatric Center and is
therefore represented twice in the stipulation of facts.
                                - 13 -


     Petitioner testified regarding certain contributions that

respondent disallowed entirely.    Petitioner provided a receipt

from the Animal Rescue League listing values, but he stated that

he had no recollection of what the items were, other than a

Chanel bag.   We shall allow $99.50 for this single item as a

donation to the Animal Rescue League.    Petitioner also introduced

a letter from The Science Museum thanking him for his

contribution, which he testified was a stamp collection and a

telescope.    We shall allow $50 as a donation to The Science

Museum.   Finally, petitioner introduced what appears to be an

advertisement for Lions SightFirst with "3 pairs prescription

sunglasses" written above it.     We shall allow $30 as a donation

to Lions SightFirst.

     Petitioners have failed to meet their burden of proving the

fair market value of the other donated property is higher than

that allowed by respondent.    Accordingly, the amount of

petitioners' charitable contributions other than by cash or check

is $14,403.50.

     For the foregoing reasons,

                                           Decision will be entered

                                      under Rule 155.
