                          T.C. Memo. 1996-412



                        UNITED STATES TAX COURT



                 ANTHONY MARTINEZ II, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 10823-94.               Filed September 12, 1996.



       Steven K. Ledbetter, for petitioner.

       Michele F. Leichtman, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       FOLEY, Judge:   By notice dated March 22, 1994, respondent

determined the following deficiencies, additions, and accuracy-

related penalties with respect to petitioner's Federal income

tax:
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                            Addition To Tax        Penalty
Year         Deficiency     Sec. 6651(a)(1)      Sec. 6662(a)1
1990           $7,168           $1,400              $1,243
1991            3,049               17                 610

     1
       Respondent appears to have miscalculated this penalty.
Twenty percent of the $7,168 deficiency is $1,434.

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

       After concessions, the issues for decision are as follows:

       1.   Whether petitioner, pursuant to section 165(f), is

entitled to a deduction for losses purportedly incurred in

connection with a gas station and a minimarket business.         We hold

that he is not.

       2.   Whether petitioner, pursuant to section 1244, is

entitled to a deduction for losses relating to stock he

purportedly owned in Three Del Rey, Inc.      We hold that he is not.

       3.   Whether petitioner, pursuant to section 6651(a), is

liable for additions to tax for failure to file his 1990 and 1991

Federal income tax returns in a timely manner.      We hold that he

is.

       4.   Whether petitioner, pursuant to section 6662(a), is

liable for accuracy-related penalties.     We hold that he is.
                               - 3 -

                         FINDINGS OF FACT

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

The Stipulation of Facts is incorporated by this reference.

Petitioner resided in Long Beach, California, at the time he

filed his petition.

I.   Purported Acquisition of Gas Station and Minimarket

      On June 7, 1989, petitioner signed an agreement with

Glendale Federal Savings and Loan Association (the Agreement).

The Agreement modified the terms of an escrow arrangement

previously entered into by petitioner.   Petitioner did not submit

documents relating to the earlier arrangement.   The Agreement

pertained to petitioner's proposed acquisition from Israel and

Sonya Dakar of a gas station and minimarket (the Business)

located at 2990 Pacific Avenue in Long Beach, California.     The

Agreement indicated that petitioner was to purchase the Business

but that the Dakars would retain ownership of the physical

premises on which the Business was located.   The Agreement

further indicated that petitioner had deposited $10,000 in an

escrow account, planned to deposit an additional $140,000 in the

account, and would execute a $175,000 promissory note and

security agreement obligating him to make monthly payments to the

Dakars.   Petitioner did not submit documentary evidence to

establish that he ultimately transferred the funds in the escrow

account to the Dakars or that he purchased the Business.
                                   - 4 -

II.    Rental Payments

       In June of 1989, petitioner began operating the Business and

paying rent of $5,000 per month to the Dakars.      In November of

1989, petitioner failed to make the required rent payment.      In

December of 1989, he paid the November rent but failed to make

the December rent payment.      As a result, the Dakars filed an

unlawful detainer complaint against him in the Municipal Court of

Long Beach, California.       On March 26, 1990, the court entered a

default judgment against petitioner and issued a writ of

possession to the Dakars with respect to the property.

III.    Three Del Rey, Inc.

        On December 21, 1988, Steven K. Ledbetter, petitioner's

attorney in this proceeding, filed with the California secretary

of state's office articles of incorporation for "R/C JET

SPECIALTIES, INC.".      Petitioner's name did not appear on the

document.    The articles indicated that the corporation was formed

"to engage in any lawful act or activity for which a corporation

may be organized" under California law.      It also indicated that

the corporation was authorized to issue 10,000 shares of stock.

The corporation, however, never issued any stock, nor did it

elect any directors.

       On March 28, 1989, Mr. Ledbetter filed an amendment to the

articles of incorporation changing the corporation's name to

"Three Del Rey, Inc." (the Corporation).      The Corporation filed a
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Federal income tax return for the 1989 tax year that reported

sales of $707,231 and a net loss of $159,139.    Petitioner did not

sign the return but was designated on it as the Corporation's

"tax matters person".

IV.   Petitioner's 1990 and 1991 Tax Returns

      Petitioner filed both his 1990 and 1991 Federal income tax

returns after the due date.    His 1990 return was signed on

January 15, 1992, and received by respondent on February 14,

1992.   His 1991 return was signed on April 27, 1992, and received

by respondent on April 29, 1992.

      On his returns, petitioner reported that he owed no tax in

either 1990 or 1991.    He reached this result by offsetting his

income with the Corporation's net operating losses.    Respondent

disallowed petitioner's use of the Corporation's losses on the

ground that the Corporation had not made a valid subchapter S

election, and as a result, the Corporation's losses did not pass

through to its shareholders.

      Petitioner ultimately conceded that he was not entitled to

deduct the losses of the Corporation on his 1990 and 1991

individual income tax returns.    He claims, however, that he was

entitled to deduct losses that more than offset his tax liability

for those years.
                                - 6 -

                               OPINION

     Petitioner bears the burden of proof with respect to each of

the four issues to be decided by this Court.   Rule 142(a); see

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

I.   Capital Loss Deduction

     Petitioner claims that he invested $152,000 in the Business,

that he lost all of his investment, and that he therefore is

entitled to deduct $152,000 as a capital loss pursuant to

section 165(f).

     Petitioner does not advance a plausible theory, however, to

explain why he is entitled to a capital loss deduction.

Petitioner did not produce any documentary evidence to establish

that he invested $152,000.    He did not present a contract or

closing agreement relating to his alleged purchase of the

Business.   He did not present any canceled checks, receipts, or

other documentary evidence of a transfer of funds.    He did not

produce any books or records detailing the operations of the

Corporation, nor did he produce any business licenses.    In short,

petitioner has failed to meet his burden of proof.

     In an attempt to substantiate his eligibility for a

deduction, petitioner submitted several pages of amended escrow

instructions and a copy of the unlawful detainer complaint filed

against him by Israel Dakar in the Municipal Court of Long Beach,
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California.   Neither document, however, is sufficient to satisfy

petitioner's burden of proof.

      The existence of an escrow agreement merely shows that, at

one point in time, property was held by a third party for

purposes of transfer to another upon the performance of specified

conditions.   See Cal. Civ. Code sec. 1057 (West 1982).   Unless

and until the conditions are satisfied, legal title does not pass

to the grantee.

      Petitioner claims that Mr. Dakar's unlawful detainer

complaint against him substantiates his investment in the

Business.   In fact, the unlawful detainer complaint proves merely

that petitioner defaulted on an obligation to pay $5,000 in

monthly rent to Mr. Dakar.   It describes neither the nature nor

the amount of petitioner's investment in the Business.

      Petitioner has presented sufficient evidence to lead us to

believe that he operated the Business, but he has not presented

sufficient evidence regarding the nature of his ownership

interest or the amount of his investment to justify a capital

loss deduction.   Therefore, we reject petitioner's claim that he

is entitled to such a deduction.

II.   Stock Loss Deduction

      Petitioner claims that he is entitled to a $1,500 stock loss

deduction pursuant to section 1244.     We disagree.
                                   - 8 -

       As discussed above, petitioner bears the burden of proving

that he is entitled to deductions and therefore must provide

sufficient evidence to substantiate his claims.        In cases where

shareholders of a corporation may seek to claim stock loss

deductions pursuant to section 1244, the corporation should

maintain records indicating "The persons to whom stock was

issued, the date of issuance to these persons, and a description

of the amount and type of consideration received from each".

Sec. 1.1244(e)-1(a)(2)(i), Income Tax Regs.

       Petitioner has submitted no evidence that the Corporation

ever issued stock.       In fact, the Amendment to the Certificate of

Incorporation, dated March 17, 1989, expressly states that "The

corporation has issued no shares."1        Even if the Court were to

find that stock had been issued, however, petitioner has not

substantiated the amount of money or the basis of any property he

transferred to the Corporation in exchange for such stock.

       Therefore, we reject petitioner's claim that he is entitled

to a stock loss deduction pursuant to section 1244.

III.       Additions to Tax Under Section 6651(a)(1)


       1
       Petitioner claims that he owned 75 percent of the stock of
the Corporation. His statements regarding ownership of the other
25 percent of the stock, however, have not been a model of
clarity. When asked at trial who owned the remaining 25 percent,
he replied: "[M]y second brother [owned] 10 percent, and my
third brother [owned] five percent -- or 20 percent." By
contrast, the Corporation's 1989 Federal income tax return
indicated that one person, not two, owned the remaining
25-percent interest in the Corporation.
                                 - 9 -

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

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

to reasonable cause and not due to willful neglect.      Petitioner

bears the burden of proving that his failure to file a timely

return was reasonable.   Rule 142(a); Larsen v. Commissioner, 765

F.2d 939, 941 (9th Cir. 1985).

      Petitioner did not request an extension of time to file

either his 1990 or 1991 Federal income tax return, and both

returns were filed after the due date.      His 1990 return was

signed on January 15, 1992 (i.e., 9 months after the due date)

and received by respondent on February 14, 1992.      His 1991 return

was signed on April 27, 1992 (i.e., 12 days after the due date)

and received by respondent on April 29, 1992.      Petitioner did not

argue that his failure to file timely returns was reasonable.

      Therefore, we conclude that petitioner is liable for

additions to tax pursuant to section 6651(a)(1).



IV.   Accuracy-Related Penalties Under Section 6662(a)

      Section 6662(a) imposes an accuracy-related penalty of 20

percent of any underpayment attributable to negligence or

disregard of rules or regulations.       Negligence is defined as the

failure to exercise the care that a reasonable and ordinarily

prudent person would exercise under the circumstances.       Allen v.
                              - 10 -

Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1

(1989).

     In the present case, petitioner claimed large net operating

losses of the Corporation that eliminated his tax liability in

both 1990 and 1991.   Petitioner acknowledges, however, that he

was not entitled to deduct the losses of the Corporation, because

the Corporation had not filed a valid subchapter S election.   In

claiming the Corporation's losses as deductions on his individual

income tax returns, petitioner was negligent in failing to follow

the provisions of the Internal Revenue Code.

     Therefore, we conclude that petitioner is liable for

accuracy-related penalties pursuant to section 6662(a).

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
