                         T.C. Memo. 1997-178



                       UNITED STATES TAX COURT



             STAN PYRON AND RUTH S. PYRON, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13906-95.                Filed April 14, 1997.




     Lee H. Brockett, for petitioners.

     Joan Steele Dennett, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

     WELLS, Judge:    Respondent determined a deficiency of

$156,964 in petitioners' 1990 Federal income tax.

     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.
                                 - 2 -

     After concessions,1 the issues to be decided are as follows:

     1.    Whether petitioners are entitled to deduct for taxable

year 1990 the portion of a loss carryforward attributable to a

bad debt deduction claimed by petitioners on their amended 1989

tax return for the worthlessness of loans made by petitioner Stan

Pyron to a mining company; and

     2.    whether petitioners are entitled to a business bad debt

deduction for taxable year 1990 for the worthlessness of loans

made by petitioner to a mining company.

                          FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.    The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case.

     At the time they filed their petition in the instant case,

petitioners resided in Florence, Montana.

     During 1979, petitioner Stan Pyron (petitioner) and Gerald

Dalton began investing in a Chilean copper mine of a mining

company called Compania Minera Esperanza (CME).    During 1984 or


1
     In the notice of deficiency, respondent disallowed, inter
alia, the bad debt deduction claimed by petitioners on their 1990
return for the worthlessness of loans in the amount of $47,938
made by petitioner Stan Pyron to Gerald Dalton, a business
associate. Respondent disallowed the deduction on the grounds
that the debt became worthless in taxable year 1988. At trial,
petitioners' counsel conceded that "1988 is the correct year for
whatever consequence flows from the Dalton activities." As 1988
is not a taxable year before us, we do not address the bad debt
deduction for the loans in the amount of $47,938 made by
petitioner to Mr. Dalton.
                               - 3 -

1985, petitioner and Mr. Dalton formed Compania Minera Adventura

(CMA), which leased the copper mines and the plant from CME.

     During 1988, in order to terminate their relationship and to

pay an outstanding debt that he owed to petitioner, Mr. Dalton

transferred his entire interest in CME to petitioner.    Prior to

Mr. Dalton's transfer of his CME interest, petitioner never

requested or demanded from Mr. Dalton any payment on loans

allegedly made by petitioner to Mr. Dalton.

     Petitioner advanced money to CME and/or CMA and alleges that

such advances were loans.   Petitioner held the power of attorney

for CME.   For petitioner's advances to CME/CMA, notes were

prepared establishing interest rates and maturity dates, but no

repayment schedules were prepared and no collateral for the notes

was given.   On the maturity dates of the notes, petitioner did

not pursue collection of either the principal of or the interest

due on the notes.

     During 1990, petitioner sold his interest in CME.

Petitioners provided no books, records, or tax returns with

respect to their interest in CME/CMA.

                              OPINION

     The issue we must resolve in the instant case is whether

petitioners are entitled to two bad debt deductions pursuant to

section 166(a)(1) for the worthlessness of loans allegedly made

by petitioner to CME/CMA.   The first bad debt deduction, claimed

by petitioners on their 1989 amended return, was for the
                               - 4 -

worthlessness of loans allegedly made by petitioner to CME/CMA in

the amount of $633,897.   As a result of their deduction of that

loss, petitioners reported on their 1989 amended return a net

operating loss which subsequently was carried forward to

petitioners' 1990 return.   Respondent argues that petitioner's

advances were not bona fide debt but, rather, contributions to

capital.   Consequently, in the notice of deficiency, respondent

disallowed the portion of the loss carryforward on petitioners'

1990 tax return attributable to the bad debt deduction in the

amount of $633,897 claimed by petitioners on their 1989 amended

return and recharacterized such amount as $64,085 in short-term

capital loss and $460,526 in long-term capital loss.

     The second bad debt deduction, claimed by petitioners on

their 1990 return, was for the worthlessness of loans allegedly

made by petitioner to CME/CMA in the amount of $4,010.

Respondent argues that petitioner's advances were not bona fide

debt but, rather, contributions to capital.   Consequently, in the

notice of deficiency, respondent disallowed the deduction and

increased petitioners' taxable income; respondent, however, did

not recharacterize the amount as a capital loss.   As an

alternative argument, respondent argues that the advances, if

they are considered bona fide debt, are nonbusiness bad debts

deductible only to the extent permitted pursuant to section

166(d).
                               - 5 -

     As to both bad debt deductions, petitioners contend that

they are entitled to deduct the loans as ordinary losses.

Alternatively, petitioners argue that the mining companies, CME

and CMA, are partnerships and that, therefore, petitioners are

entitled to deduct their distributive share of the mining

partnerships' losses against ordinary income for each taxable

year.2

     Section 166(a)(1) provides, in general, for the deduction of

debts that become wholly worthless during a taxable year.

Section 166, however, distinguishes between business bad debts

and nonbusiness bad debts.   Sec. 166(d); sec. 1.166-5(b), Income

Tax Regs.   Business bad debts may be deducted against ordinary

income if they become wholly or partially worthless during the

year (in the case of the latter, to the extent charged off during

the taxable year as partially worthless debts).   Sec. 1.166-3,

Income Tax Regs.   To qualify for the business bad debt deduction,

the taxpayer must establish that the debt was proximately related

to the conduct of the taxpayer's trade or business.   United

States v. Generes, 405 U.S. 93, 103 (1972); sec. 1.166-5(b),

Income Tax Regs.



2
     Petitioners concede that they did not claim their
distributive share of the partnership losses on their personal
returns for the years in which they were incurred and that the
statute of limitations bars claiming this loss now. Petitioners,
however, seek to adjust their basis in their investment and the
notes to reflect the losses that they should have claimed.
                                  - 6 -

     Nonbusiness bad debts, on the other hand, may be deducted,

but only if they become entirely worthless during the year

claimed; they are, moreover, to be treated as short-term capital

losses.   Sec. 166(d).    Generally, a nonbusiness bad debt is a

debt other than a debt (1) created or acquired in the trade or

business of the taxpayer or (2) the loss from the worthlessness

of which is incurred in a trade or business of the taxpayer.

Sec. 166(d)(2).   The question of whether a debt is a nonbusiness

bad debt is a question of fact.     Sec. 1.166-5(b), Income Tax

Regs.

     A deduction for a bad debt is limited to a bona fide debt.

Sec. 1.166-1(c), Income Tax Regs.     A bona fide debt is a debt

that "arises from a debtor-creditor relationship based upon a

valid and enforceable obligation to pay a fixed or determinable

sum of money."    Id.    For purposes of section 166, a contribution

to capital is not considered a debt.      In re Uneco, Inc., 532 F.2d

1204, 1207 (8th Cir. 1976); Kean v. Commissioner, 91 T.C. 575,

594 (1988); sec. 1.166-1(c), Income Tax Regs.

     Deductions are a matter of legislative grace, and

petitioners bear the burden of proving that they are entitled to

the deductions claimed.     Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435 (1934).     Taxpayers are required to

maintain records that are sufficient to enable the Commissioner

to determine their correct tax liability.     See sec. 6001;
                                - 7 -

Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965); sec.

1.6001-1(a), Income Tax Regs.   Moreover, a taxpayer who claims a

deduction bears the burden of substantiating the amount and

purpose of the item claimed.    Hradesky v. Commissioner, 65 T.C.

87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976);

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

     Characterization of an advance as either a loan (i.e., debt

owed to the lender) or capital contribution (i.e., equity held by

the contributor in the entity) is a question of fact which must

be answered by reference to all of the evidence, with the burden

on the taxpayer to establish that the alleged loans were bona

fide debt.   Rule 142(a); Dixie Dairies Corp. v. Commissioner, 74

T.C. 476, 493 (1980); Yale Avenue Corp. v. Commissioner, 58 T.C.

1062, 1073-1074 (1972).   The taxpayer's assertion that an advance

was a loan is not determinative of the issue of characterizing an

advance as debt or equity.   See In re Uneco, Inc., supra.

Advances to a closely held corporation by its shareholders are

subject to particular scrutiny, as "The absence of arm's-length

dealing provides the opportunity to contrive a fictional debt

shielding the real essence of the transaction and obtaining

benefits unintended by the statute."    Gilboy v. Commissioner,

T.C. Memo. 1978-114.

     In the instant case, the record consists of only the notice

of deficiency and copies of petitioners' 1989 return, 1989

amended return, and 1990 return.   Petitioners provided no books,
                               - 8 -

records, or tax returns with respect to their interest in

CME/CMA.   Additionally, petitioners did not provide promissory

notes evidencing the alleged loans to CMA/CME or books and

records reflecting petitioners' lending activities.     At trial,

petitioner testified that he had some books and records in

Florence, Montana.   Additionally, at trial, petitioners' counsel

stated that, after petitioner sold his interest in CME during

1990, the new owner threw away most of the records.

     We first examine whether petitioner's advances to CME/CMA

were bona fide debt.   The parties stipulated that, for

petitioner's loans to CME/CMA, notes were prepared establishing

interest rates and maturity dates.     As to the first bad debt

deduction for the worthlessness of advances allegedly made by

petitioners to CME/CMA in the amount of $633,897, however,

petitioners failed to provide the notes or any other documentary

evidence and sought to substantiate the loans only through

petitioner's testimony.   We are not required to accept

petitioner's self-serving and uncorroborated testimony,

particularly where other and better evidence to prove the point

in question should be available.     Wood v. Commissioner, 338 F.2d

602, 605 (9th Cir. 1964), affg. 41 T.C. 593 (1964).     Under the

circumstances of the instant case, we do not credit petitioner's

testimony where it is not corroborated by documentary or other

reliable evidence.   Consequently, we conclude that petitioners
                                - 9 -

did not establish that the advances to CME/CMA in the amount of

$633,897 were bona fide debt.

     As to the second bad debt deduction for the worthlessness of

loans made by petitioners to CME/CMA in the amount of $4,010,

petitioners provided no business records, checks, or receipts to

corroborate petitioner's testimony that the amount was actually

advanced.   It is well established that, in the absence of

corroborating evidence, we are not required to accept self-

serving testimony.   Niedringhaus v. Commissioner, 99 T.C. 202,

212 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); see

Jackson v. Commissioner, 19 T.C. 133, 145 (1952), affd. 207 F.2d

857 (10th Cir. 1953).   Consequently, we conclude that petitioners

did not establish that the advances to CME/CMA in the amount of

$4,010 were bona fide debt.

     As to petitioners' remaining arguments, we conclude that

petitioners have not carried their burden of proving that they

are entitled to the alleged losses.     As we stated above,

petitioners provided no books, records, or tax returns with

respect to their interests in CME or CMA.     Additionally,

petitioners did not provide promissory notes evidencing the

alleged loans to CME/CMA or books and records reflecting

petitioners' lending activities.

     Taxpayers are required to maintain records that are

sufficient to enable the Commissioner to determine their correct

tax liability.   See sec. 6001; Meneguzzo v. Commissioner, supra;
                               - 10 -

sec. 1.6001-1(a), Income Tax Regs.      We conclude that petitioners

did not carry their burden of substantiating the amount and

purpose of either of the two bad debt deductions.     Accordingly,

we hold that petitioners are not entitled to the two bad debt

deductions in the amounts of $633,897 and $4,010 for the

worthlessness of loans allegedly made by petitioners to CME/CMA.3

     Under the circumstances of the instant case, we are not

required to, and we generally do not, rely on petitioner's

testimony to sustain petitioners' burden of proving error in

respondent's determinations.   See Geiger v. Commissioner, 440

F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo.

1969-159; Wood v. Commissioner, supra; Tokarski v. Commissioner,

supra; Hradesky v. Commissioner, 65 T.C. 87 (1975).      Accordingly,

we sustain respondent's determinations.

     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.


3
     As we stated above, in addition to disallowing the portion
of the loss carryforward on petitioners' 1990 tax return
attributable to the first bad debt deduction in the amount of
$633,897, respondent recharacterized the amount as $64,085 in
short-term capital loss and $460,526 in long-term capital loss.
Respondent argues that petitioners conceded on brief that
$158,586 should not be included in the first bad debt deduction
of $633,897. Petitioners' argument regarding the $158,586
amount, however, was premised upon the mining companies' being
treated as partnerships. As we address the bad debt deductions
on other grounds, we do not view petitioners' argument as a
concession.
