                       T.C. Memo. 2000-50




                     UNITED STATES TAX COURT



  ALLEN C. CHAMBERLIN AND MARTHA L. CHAMBERLIN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1223-98.                   Filed February 11, 2000.



     Lorentz W. Hansen, for petitioners.

     John Aletta, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Chief Judge:   Respondent determined the following

deficiencies, additions to tax, and penalties with respect to

petitioners’ Federal income tax:
                                                     - 2 -

                                                    Additions to Tax and Penalties
                            Sec.         Sec.           Sec.           Sec.             Sec.         Sec.
Year   Deficiency        6651(a)(1)   6651(a)(2)     6653(a)(1)   6653(a)(1)(A)    6653(a)(1)(B)1   6662(a)

1985   $             0   $      212   $      192     $       66   $        —      $          —      $        —
1986             5,282        2,991        1,572              —          827             5,282               —
1987             1,376          332           52              —           74             1,376               —
1988             2,921          774          861            172            —                 —               —
1989            16,214        2,178        2,420              —            —                 —           3,190
1990            41,339       11,067       12,051              —            —                 —           8,132
1991            37,713        6,681        1,710              —            —                 —           7,543
1992            49,979        9,940        1,254              —            —                 —           9,954
1993           141,892       30,766        1,050              —            —                 —          28,378
           1
            50% of the interest due upon these amounts.


           The issues for decision are:                     (1) The amount of losses

sustained by petitioners from their investments in, loans made

to, and loan guaranties for several pharmaceutical corporations

between 1979 and 1984; (2) the years petitioners were entitled to

recognize their losses; (3) whether the losses became part of the

personal bankruptcy estate of petitioners; (4) the amount of

carryover losses used by the personal bankruptcy estate of

petitioners; (5) the character of any remaining losses; and

(6) whether petitioners are liable for penalties and additions to

tax for 1985 through 1993.                         Other issues in the statutory notice

or in the petition have been abandoned by petitioners because

they failed to present any evidence or argument concerning them.

           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.
                                 - 3 -


                            FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

     At the time of the filing of their petition, petitioners

resided in Greenwich, Connecticut.       Allen C. Chamberlin

(petitioner) is a doctor of orthopedic medicine, having graduated

from the Boston University School of Medicine.         Petitioners filed

their joint Forms 1040, U.S. Individual Income Tax Return, for

1982 through 1993 on the following dates:
                     Year                Filing Date

                     1982                 07/11/84
                     1983                 09/06/94
                     1984                 09/06/94
                     1985                 09/17/88
                     1986                 09/17/88
                     1987                 09/17/88
                     1988                 04/17/95
                     1989                 04/04/95
                     1990                 04/17/95
                     1991                 03/27/95
                     1992                 03/27/95
                     1993                 10/16/95

The initial 1985, 1986, and 1987 Forms 1040 were blank and

contained no financial information.       Subsequently, on

December 28, 1994, petitioners filed completed Forms 1040 for

these years.   Petitioners reported $1,324, $11,264, $98, $521,

$1,584, $7,849, $9,499, $10,450, and $11,057 of total tax on

their returns for 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992,
                               - 4 -


and 1993, respectively.   Petitioners prepared their returns with

the help of a certified public accountant.

     Pharmacare, Inc. (Pharmacare), was a Delaware corporation

engaged in the business of manufacturing unit dose pharmaceutical

products and packaging cosmetic products and lotions.    The main

manufacturing facility for Pharmacare was located in Largo,

Florida (Largo facility).

     During 1978, Pharmacare was in serious financial difficulty

and was looking for investors to provide working capital for the

company.   A group of investors led by Stelios Vavlitis (Vavlitis)

agreed to invest funds in Pharmacare in exchange for a

controlling interest in the outstanding stock of the corporation.

Vavlitis planned to rebuild Pharmacare under his management and

to attract other investors to provide working capital.    Vavlitis

created Pharmaco Trust, which bought an 87.6-percent interest in

the outstanding stock of Pharmacare and held the acquired stock

for management and sales purposes.     Vavlitis was made president,

chief executive officer, and chairman of the board of directors

of Pharmacare.

     In 1978, Vavlitis persuaded petitioner to purchase three

units of Pharmaco Trust for $99,000.    In doing so, Vavlitis made

material false representations and misstatements about his prior

business experience, his educational background, Pharmacare’s
                                 - 5 -


ownership of patents, and the amount of competition that

Pharmacare faced in the marketplace.     In 1979 and 1980, Vavlitis

also persuaded petitioner to make substantial unsecured loans to

Pharmacare in order to keep the company running.    Vavlitis failed

to provide promissory notes for these loans despite repeated

requests by petitioner.

     On June 12, 1980, creditors of Pharmacare filed a chapter 7

involuntary bankruptcy petition against the company in the

U.S. Bankruptcy Court for the Middle Division of Florida.    As an

unsecured creditor of Pharmacare, petitioner did not receive any

payment from the Pharmacare bankruptcy to reimburse his

investment or his loans.   On their Form 1040, U.S. Individual

Income Tax Return for 1982, petitioners deducted a loss from

their Pharmacare investment and loans as a section 165 theft

loss.   Respondent audited the 1982 return and disallowed the

loss.

     On March 9, 1981, petitioner organized The Chamberlin

Corporation (The Chamberlin Corp.), a Delaware corporation

licensed to do business in Florida, for the purpose of continuing

the Largo, Florida, operation.    Petitioner became an 80-percent

shareholder in The Chamberlin Corp., was elected chairman of the

board of directors, and was hired as the chief executive officer.

Petitioner did not receive a wage for the services he rendered in
                               - 6 -


these positions.   The Chamberlin Corp. purchased the inventory,

intangible property, personal property, and equipment of

Pharmacare from the trustee in bankruptcy for $200,000 and then

immediately transferred ownership to petitioner.    On

September 18, 1981, in a three-party agreement, petitioner

purchased the Largo facility from the Pharmacare trustee in

bankruptcy by giving The Chamberlin Corp. a $183,800 promissory

note and assuming $572,046 of debt secured by the property.     The

Chamberlin Corp. then paid $177,954 of Pharmacare debt on behalf

of the trustee and $4,077 of transfer expenses.    Petitioner

rented the Largo facility back to The Chamberlin Corp. from 1981

until 1984.

     On November 3, 1982, petitioner obtained a personal loan

from the Freedom Federal Savings & Loan Association (Freedom

Federal) in the amount of $1,750,000.   This loan was secured by a

first mortgage on the principal residence of petitioners in

Greenwich, Connecticut.   Four hundred fifty thousand dollars of

the loan proceeds was then reloaned by petitioner to The

Chamberlin Corp. and used to pay off debts of The Chamberlin

Corp.   The Chamberlin Corp. also obtained loans from the

Ingersoll-Rand Financial Corporation (Ingersoll-Rand) in the

amount of $1,800,000, personally guaranteed by petitioner, and

loans in the amounts of $750,000 and $250,000, secured by second
                               - 7 -


mortgages on the Greenwich residence.   Petitioner also personally

guaranteed a loan of $300,000 from Ingersoll-Rand that was made

to his incorporated medical practice.

     In 1983, petitioner purchased Bel-Mar Laboratories (Bel-

Mar), a company whose principal purpose was the manufacture of

parenteral products.   Parenteral describes liquid medication

injected by syringe or needle directly into the bloodstream of a

patient.   Petitioner became the sole shareholder and chairman of

the board of directors of Bel-Mar, and he immediately changed the

name to Chamberlin Parenteral, Inc. (Chamberlin Parenteral).

     In 1984, The Chamberlin Corp. was unable to pay its debts,

and, on December 17, 1984, creditors filed an involuntary

chapter 11 bankruptcy petition against the company.   Petitioner

continued to search for outside investments to save the company,

and the company continued to operate at least through March 1985.

The assets of The Chamberlin Corp., including the Largo facility

that had been surrendered to the corporation by petitioner, were

sold to pay debts of the company in June 1985.

     On July 11, 1985, petitioners filed a personal chapter 11

petition in bankruptcy.   Petitioners did not make a section

1398(d)(2) election to terminate their taxable year on

commencement of the bankruptcy.   On the date of filing, debts of

petitioners totaled $6,319,354, while their assets totaled
                                 - 8 -


$3,785,790.   On August 15, 1985, the personal residence of

petitioners was sold for $3,700,000 to satisfy creditor claims.

This residence had been purchased by petitioners for $530,000.

From the sale proceeds, the debt that was owed to Freedom Federal

in the amount of $1,750,000 plus $550,000 in past due interest

was paid in full.    Ingersoll-Rand received $944,049 in partial

satisfaction of its claims.    The bankruptcy estate failed to file

an estate tax return for 1985.

     After filing their personal petition in bankruptcy,

petitioners moved to California.    All of their personal assets,

which became the property of the bankruptcy estate, were placed

in storage.   Among these items were important business documents

and tax records.    Petitioners were unable to retrieve these

documents because the bankruptcy estate failed to make the proper

storage payments.

                               OPINION

     Petitioners bear the burden of proving that the

determinations in the notice of deficiency are erroneous and that

they are entitled to any deductions claimed on their returns.

See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).    A

recurring problem for petitioners at trial was a failure to

provide adequate supporting documentation and receipts to
                               - 9 -


corroborate petitioner’s testimony.    The unavailability of

corroborating documents does not excuse a taxpayer’s failure to

carry the burden of proof.   See Malinowski v. Commissioner, 71

T.C. 1120, 1124-1125 (1979).

     Petitioners claim that they were the victims of theft at the

hands of Vavlitis and, therefore, should be entitled to deduct

their losses arising from their loans to and investment in

Pharmacare as a section 165(c) theft loss.    Petitioner also

claims that he engaged in the trade or business of promoting

pharmaceutical companies from 1978 to 1985 and, therefore, that

he is entitled to deduct any losses arising from loans to or

investment in Pharmacare, The Chamberlin Corp., and Chamberlin

Parenteral as section 162(a) business expenses or section 166(a)

business bad debts.

     In coming to a decision on the issues in this case, it is

necessary to calculate the amount of losses incurred by

petitioners in years predating the tax years in issue.    We do not

have jurisdiction over years prior to 1985.    See sec. 6214(b).

However, the Court may consider events that occurred in prior

years when such consideration is necessary to determine the tax

liability for the years in issue.   See Lone Manor Farms, Inc. v.

Commissioner, 61 T.C. 436, 440 (1974), affd. without published

opinion 510 F.2d 970 (3d Cir. 1975).
                               - 10 -


     In the capacity of a creditor, a taxpayer realizes a loss

from a loan made to a corporation that becomes worthless and

uncollectible.   The amount of loss from a worthless loan is the

adjusted basis of the promissory note representing the debt.      See

sec. 166.   The adjusted basis of a note equals the face amount of

the debt minus any principal paid back by the debtor corporation.

See sec. 1.166-1, 1.1011-1, Income Tax Regs.   Where a taxpayer

borrows money from a third party and contributes or reloans the

proceeds to a corporation, the taxpayer includes the proceeds

transferred to the corporation in the basis of his stock in the

corporation or in the promissory note representing the debt.     The

increase in basis occurs regardless of whether the taxpayer

repays the third-party loan.   See Brenner v. Commissioner, 62

T.C. 878, 883 (1974).

                         Amount of Losses

     Petitioners claim to have suffered a loss in the amount of

$1,255,400 from petitioner’s dealings with Pharmacare.

Respondent concedes that a loss was incurred by petitioners in

the amount of $414,000 but contests the occurrence of the

following transfers, which petitioners claim were loans made to

Pharmacare:
                                - 11 -


          Loans                  Date       Amount

           Wire transfer       --/--/79   $ 25,000

           Checks              10/19/79     10,000
                               10/19/79     10,000
                               10/19/79     10,000
                               10/19/79     10,000
                               10/19/79     10,000
                               11/19/79     16,000
                               11/21/79     49,500
                               12/05/79     33,000
                               12/12/79     45,000

           Third-party         08/06/79    364,000
           loan proceeds       08/23/79     35,000
                               08/24/79    120,000
                               09/12/79     40,000
                               07/01/80     30,000

           Miscellaneous       05/–-/79     30,000
           loans               06/–-/79      3,900
           Total                          $841,400


     Petitioners have provided five canceled checks endorsed to

Pharmacare totaling $56,000.    Petitioners have also provided

evidence of third-party loans made to petitioner and Vavlitis

jointly in the amounts of $364,000, $35,000, and $40,000.

Petitioners have shown that the proceeds from these loans were

contributed or reloaned to Pharmacare by petitioner and that the

loans were repaid with property of petitioner.       With respect to

the remaining contested transactions, petitioners rely on a proof

of claim filed in the Pharmacare bankruptcy and dated April 28,

1982.   Under the circumstances, we conclude that petitioners’
                              - 12 -


minimal documents and testimony are sufficient to substantiate

the amount of loss with respect to Pharmacare.

     Petitioners also claim that they are entitled to recognize

losses from petitioner’s contributions to The Chamberlin Corp.

and Chamberlin Parenteral.   To substantiate their losses,

petitioners have provided only a statement of net worth, prepared

in 1982, that showed that petitioners’ net worth was $6,032,052.

They argue that their net worth fell to zero in 1985 as a result

of The Chamberlin Corp. failure, and, therefore, they should be

entitled to a loss of $6,032,052.   Such a statement,

uncorroborated by receipts, expenses, or other documentation that

reflects how assets were lost or disposed of, is insufficient for

determining the amount of losses sustained by petitioners.     See

Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 745-746

(1973).   Thus, where petitioners have failed to provide any

documentation to substantiate their loss, they have failed to

carry their burden of proving entitlement to deductions.

     Petitioners have provided documentation relating to a loan

that was made from a third party to petitioner personally and

loans that were made to The Chamberlin Corp., which were secured

and satisfied by personal property of petitioner.   First,

petitioners argue that they are entitled to recognize $1,750,000

of loss stemming from a personal loan from Freedom Federal.
                                - 13 -


Petitioner claims that he contributed or reloaned the entire

amount of proceeds to The Chamberlin Corp. and Chamberlin

Parenteral.   Respondent argues that only $450,000 of the

principal was reloaned to these corporations.    Second,

petitioners argue that they are entitled to losses stemming from

funds that petitioner contributed to The Chamberlin Corp., which

were used for operating capital and the initial purchase of the

Pharmacare assets in 1981.

     Of the principal amount of the Freedom Federal loan,

$450,000 was reloaned to The Chamberlin Corp. and used to repay a

portion of a debt owed by The Chamberlin Corp. to E.F. Hutton

Credit Corporation.    Petitioner testified at trial that the

remaining $1,300,000 of the Freedom Federal loan was used to

purchase Bel-Mar, which later became Chamberlin Parenteral, and

to provide working capital or to pay debts of The Chamberlin

Corp.   Petitioner also testified that he contributed all of the

funds used by The Chamberlin Corp. to buy the assets of

Pharmacare from the trustee in bankruptcy in 1981.

     Petitioner has failed to provide sufficient evidence showing

that the $1,300,000 of remaining principal was reloaned or

contributed to either corporation or to show how much funding, if

any, he provided to The Chamberlin Corp. for the asset purchases

or startup costs.     There is no contemporaneous corroboration of
                              - 14 -


his generalized testimony.   Therefore, petitioners’ allowable

losses from their contributions or reloans of the Freedom Federal

loan proceeds to The Chamberlin Corp. or Chamberlin Parenteral

are no more than $450,000.

     The next argument of petitioners, which respondent does not

contest, is that petitioners’ bankruptcy estate is entitled to a

loss of $944,049 for its partial repayment of loans made by

Ingersoll-Rand to The Chamberlin Corp.    The loans, which totaled

$2,900,000, were repaid to the extent of $944,049 by the

bankruptcy estate of petitioners.    A guarantor, such as

petitioner, who pays part of a loan for a corporation in

bankruptcy is deemed to have made a loan to the corporation for

the amount paid to the creditor.    The loan, deemed made to the

corporation, is deductible as a worthless debt.    See sec. 1.166-

9, Income Tax Regs.

Timing of Losses of Petitioners

     Petitioners argue that their $1,255,400 loss arising from

Pharmacare should be recognizable in 1985, the year that the

assets of The Chamberlin Corp. were sold in bankruptcy.     This

argument hinges upon a finding that The Chamberlin Corp. and

Pharmacare should be regarded as the same entity.    However,

Pharmacare terminated and ceased to exist after the closing of

its chapter 7 bankruptcy estate.    The Chamberlin Corp. was a
                               - 15 -


wholly separate organization that operated free and clear of

Pharmacare’s former debt, and any claims that petitioner had

against Pharmacare were resolved with that corporation’s

bankruptcy discharge.   The latest date when the loss would have

been realized was 1982, the year petitioner filed his claim

against the bankruptcy estate of Pharmacare.    At that point, he

had no realistic possibility of recovery.   See Morton v.

Commissioner, 38 B.T.A. 1270, 1278-1279 (1938), affd. 112 F.2d

320 (7th Cir. 1940); Mack v. Commissioner, T.C. Memo. 1995-482;

sec. 1.165-1(d), Income Tax Regs.   Therefore, the loss could only

be used by petitioners as a section 172 net operating loss (NOL)

carryover or capital loss carryover during the years in issue,

depending on the character of the loss.

     The $450,000 loss, arising from the Freedom Federal loan

proceeds, was realized by petitioner in 1985.   A bad debt

deduction is realized in the year it becomes worthless.     See sec.

1.166-1(a), Income Tax Regs.   The question of when a bad debt

becomes worthless is a factual question based on all of the

surrounding circumstances.   Although bankruptcy is a strong

indicator of when a debt becomes worthless, it is not an absolute

rule that a loss becomes recognizable upon the filing of a

petition in bankruptcy.   See sec. 1.166-2, Income Tax Regs.
                                - 16 -


     Creditors of The Chamberlin Corp. filed an involuntary

petition in bankruptcy against the company on December 17, 1984.

However, The Chamberlin Corp. continued to operate and sought

outside investment in a quest to avoid involuntary bankruptcy

until at least March 1985.     Until the company accepted its

involuntary bankruptcy fate in 1985, there was a reasonable

possibility that the company could be saved and that petitioner

could recover some or all of his $450,000 loan to The Chamberlin

Corp.     See Morton v. Commissioner, supra at 1278.

                          Personal Bankruptcy

        Having decided the amount and timing of losses sustained by

petitioners and the amount of losses sustained by their

bankruptcy estate, the next issue for decision is the effect that

petitioners’ personal chapter 11 bankruptcy had on these losses.

        Upon the filing of a voluntary chapter 11 petition in

bankruptcy, certain tax attributes listed in section 1398(g)

become property of the bankruptcy estate and are no longer tax

attributes of the taxpayer.     Section 1398(g) reads as follows:

             SEC. 1398(g) Estate Succeeds to Tax Attributes of
        Debtor.--The estate shall succeed to and take into
        account the following items (determined as of the first
        day of the debtor’s taxable year in which the case
        commences) of the debtor--

                  (1) Net operating loss carryovers.--The net
             operating loss carryovers determined under section
             172.
                               - 17 -


               (2) Charitable contributions carryovers.--The
          carryover of excess charitable contributions
          determined under section 170(d)(1).

               (3) Recovery of tax benefits items.--Any
          amount to which section 111 (relating to recovery
          of tax benefit items) applies.

               (4) Credit carryovers, etc.--The carryovers
          of any credit, and all other items which, but for
          the commencement of the case, would be required to
          be taken into account by the debtor with respect
          to any credit.

               (5) Capital loss carryovers.--The capital
          loss carryover determined under section 1212.

               (6) Basis, holding period, and character of
          assets.--In the case of any assets acquired (other
          than by sale or exchange) by the estate from the
          debtor, the basis, holding period, and character
          it had in the hands of the debtor.

               (7) Method of accounting.--The method of
          accounting used by the debtor.

               (8) Other attributes.--Other tax attributes
          of the debtor, to the extent provided in
          regulations prescribed by the Secretary as
          necessary or appropriate to carry out the purposes
          of this section.

     The bankruptcy estate uses any tax attribute received from

the taxpayer plus its own attributes to reduce its taxable

income.   See sec. 1398(g).   Certain tax attributes not used by

the bankruptcy estate are returned to the taxpayer upon

termination of the estate.    See sec. 1398(i).

     From 1982 until 1985, petitioners could not use any of their

$1,255,400 carryover loss from Pharmacare to reduce taxable
                              - 18 -


income.   Under section 1398(g), the bankruptcy estate received

the carryover loss from petitioners upon the filing of the

bankruptcy petition.   The bankruptcy estate of petitioners is

also entitled to any loss arising from the payment of $141,429 of

interest, the amount of interest paid by the estate that was

proportional to the $450,000 loan made to The Chamberlin Corp.

from the Freedom Federal loan proceeds.    Combined with the

$944,049 worthless debt from the Ingersoll-Rand loan payment, the

bankruptcy estate of petitioners had a combined loss of

$2,340,878 available to reduce its taxable income beginning in

1985, the year the estate came into being.

      The entire amount of loss is carried to the earliest taxable

years to which such loss may be carried.    See Lone Manor Farms,

Inc. v. Commissioner, 61 T.C. at 441.     The portion of such losses

that is carried to other taxable years is the excess, if any, of

the amount of loss over the sum of the taxable income for each of

the prior taxable years to which such loss may be carried.     See

id.   Therefore, when a taxpayer claims carryover losses for the

year in issue, it is necessary to determine whether the carryover

losses, claimed as a deduction for that year, are still available

or were absorbed as allowable deductions in prior taxable years.

See id.   A carryover loss deduction for a prior year, which would

have been allowed if claimed, must be considered as actually
                               - 19 -


having been allowed when determining the availability of a loss

carryover to a subsequent year.   See id.

     The bankruptcy estate of petitioners did not file a tax

return for 1985 and, therefore, did not use any allowable losses

to offset taxable income in that year.   During the later taxable

years of the bankruptcy estate, 1986 to 1994, the bankruptcy

estate filed tax returns but could not use any of the carryover

losses to reduce its income.

     Petitioners have failed to produce the evidence necessary to

calculate the taxable income of the bankruptcy estate for 1985,

thus making it impossible to determine how much of the loss

belonging to the bankruptcy estate was absorbed.   Because we

cannot determine whether any or all of the loss was absorbed by

the bankruptcy estate, we conclude that petitioners have failed

to prove that any amount thereof may be carried forward to the

years in issue.   However, even if we were to assume that the

bankruptcy estate had no more income in 1985 than what the record

before us reflects, the taxable income of the bankruptcy estate

in 1985 would be more than enough to absorb completely $2,340,878

of deductible loss.

     The bankruptcy trustee sold the personal residence of

petitioners on August 20, 1985.   The amount realized from the

sale was equal to the $3,700,000 purchase price, and the adjusted
                              - 20 -


basis was equal to the $530,000 cost basis.   Although petitioner

testified that he made several improvements to the property

during his years of ownership that would adjust the basis upward,

he presented no supporting receipts or documentation.   Thus, the

gain that was realized by the bankruptcy estate was equal to

$3,170,000.   See sec. 1001(a).

     Petitioners argue that the estate should be allowed to use

the $125,000 one-time exclusion of gain under section 121.

However, we need not address the issue of whether the one-time

exclusion is available for use by a bankruptcy estate because an

election was not made by the estate under section 121(c).     An

election to use the one-time exclusion must be made prior to the

expiration of the period for making a claim for refund of Federal

income tax for the taxable year in which the sale or exchange

occurred.   See sec. 1.121-4(a), Income Tax Regs.   Any attempt by

petitioners to make the election currently for the bankruptcy

estate would be untimely.

     The $3,170,000 of income from the sale of the personal

residence in 1985 completely absorbs the $2,340,878 loss

belonging to the bankruptcy estate.    Thus, petitioners would have

no carryover losses surviving the estate upon its termination to

reduce petitioners’ income during the years in issue.   Having

concluded that none of the losses belonging to the bankruptcy
                             - 21 -


estate survived 1985, it is not necessary for us to determine

their character.

     Section 1398(g), however, prevents certain attributes from

passing from a taxpayer to the bankruptcy estate.   The $450,000

loss of funds borrowed from Freedom Federal and reloaned to The

Chamberlin Corp., recognizable by petitioners in 1985, was a bad

debt under section 166 at the time of the filing of the personal

chapter 11 petition in bankruptcy.    A section 166 deduction is

not specifically mentioned in section 1398(g) as being an

attribute that becomes part of the estate.    Because petitioners

did not make a section 1398(d)(2) election to split 1985 into 2

taxable years, the section 166 deduction did not become part of

an NOL upon the filing of the petition in bankruptcy.    Section

1398(g) thus preserves the section 166 deduction for the debtor.

The $450,000 loss was recognizable by petitioners on their 1985

tax return, and any unused portion became a carryover NOL or

capital loss belonging to petitioners and is available for use by

petitioners as an offset of taxable income in later years.

Character of the $450,000 Loss

     Whether the $450,000 loss was a business bad debt under

section 166(a)(1) or a nonbusiness bad debt under section

166(d)(2) depends on whether petitioner was engaged in a trade or

business with respect to his endeavors with The Chamberlin Corp.
                               - 22 -


See Fincher v. Commissioner, 105 T.C. 126, 136 (1995).     A

nonbusiness bad debt is deductible as a short-term capital loss,

while a business debt is deductible as an ordinary loss.       See

sec. 166.

     Petitioners contend that, from 1978 until 1984, petitioner

was engaged in the trade or business of promoting business

ventures in the health care industry.    Respondent argues that

petitioner’s dominant motive for acquiring and guaranteeing loans

for The Chamberlin Corp. was for investment purposes and that the

activities of petitioner with regard to his promotion of business

ventures do not rise to the level of a trade or business.

     In order to be engaged in carrying on a trade or business,

the taxpayer must be involved in the activity with continuity and

regularity, and the taxpayer’s primary purpose for engaging in

the activity must be for income or profit.    See Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).    Activities that are

sporadic do not qualify as a trade or business.    See Polakis v.

Commissioner, 91 T.C. 660, 670-672 (1988).    The management of

one’s own investments is not considered a trade or business no

matter how extensive or substantial the investment activities

might be.    See King v. Commissioner, 89 T.C. 445, 458 (1987).

Resolution of this issue requires an examination of the facts of

each case.   See Commissioner v. Groetzinger, supra at 36.
                             - 23 -


     In Whipple v. Commissioner, 373 U.S. 193 (1963), the Supreme

Court determined whether loans made by a shareholder to a

corporation, in which he held a substantial interest, were

deductible as business bad debts.   In holding that the debts were

not incurred in a trade or business of the taxpayer, the Supreme

Court stated:

          Devoting one’s time and energies to the affairs of
     a corporation is not of itself, and without more, a
     trade or business of the person so engaged. Though
     such activities may produce income, profit or gain in
     the form of dividends or enhancement in the value of an
     investment, this return is distinctive to the process
     of investing and is generated by the successful
     operation of the corporation’s business as
     distinguished from the trade or business of the
     taxpayer himself. When the only return is that of an
     investor, the taxpayer has not satisfied his burden of
     demonstrating that he is engaged in a trade or business
     since investing is not a trade or business and the
     return to the taxpayer, though substantially the
     product of his services, legally arises not from his
     own trade or business but from that of the corporation.
     Even if the taxpayer demonstrates an independent trade
     or business of his own, care must be taken to
     distinguish bad debt losses arising from his own
     business and those actually arising from activities
     peculiar to an investor concerned with, and
     participating in, the conduct of the corporate
     business.

          If full-time service to one corporation does not
     alone amount to a trade or business, which it does not,
     it is difficult to understand how the same service to
     many corporations would suffice. To be sure, the
     presence of more than one corporation might lend
     support to a finding that the taxpayer was engaged in a
     regular course of promoting corporations for a fee or
     commission, * * * or for a profit on their sale, * * *
     but in such cases there is compensation other than the
     normal investor’s return, income received directly for
                               - 24 -


     his own services rather than indirectly through the
     corporate enterprise * * *.

Id. at 202-203.   This Court has interpreted this language to mean

that, in order for a taxpayer to be engaged in a trade or

business of promoting business ventures, he must undertake such

activity for compensation other than a normal investor’s return.

Such compensation must be in the form of a fee or commission or

from the sale of the corporation for a profit in the ordinary

course of business.   See Deely v. Commissioner, 73 T.C. 1081,

1093 (1980), supplemented by T.C. Memo. 1981-229.    Buying and

selling businesses for profit can constitute a trade or business

if the taxpayer shows that the entities were organized or

acquired with the intent to make a quick and profitable sale

after each business has become established, rather than with a

view toward long-range investment gains.   See Id.

     In Farrar v. Commissioner, T.C. Memo. 1988-385, this Court

found that a taxpayer was engaged in the trade or business of

promoting business ventures.   The taxpayer in Farrar bought and

sold over 31 businesses, acquiring each one with the intent to

bring in his own management staff, rebuild the company, and then

sell it once the business became viable.   Of the three businesses

involved for which the taxpayer was claiming losses, the taxpayer

had a plan aimed at earning a profit through the sale of the

business.
                                - 25 -


     In Fleischaker v. Commissioner, T.C. Memo. 1999-427, this

Court found that a taxpayer was not engaged in the trade or

business of promoting business ventures.      In Fleischaker, the

taxpayer guaranteed several loans made to an adult assisted-

living center so that the corporation could build its facilities

and cover operating expenses.    The taxpayer based his investments

on his belief that the demand for adult assisted-living centers

would steadily increase due to the growing population of American

senior citizens.   The taxpayer intended to acquire interests in

multiple adult assisted-living centers throughout the country and

profit from his long-term stock ownership.

     Petitioner has failed to show that he acquired his business

ventures with an intent to sell them in the near future for

profit.   Instead, petitioner testified that he intended to build

The Chamberlin Corp. into a much larger corporation and to hold

the corporation for an extended amount of time.      Petitioner

testified that his motive for engaging in The Chamberlin Corp.

venture was his belief that the demand for generic

pharmaceuticals would steadily increase throughout the 1980's and

that anyone positioned in the generic pharmaceutical market would

stand to make a large sum of money.      Petitioner was not paid

compensation for his services to the corporation.      His activities

are more analogous to those of an investor attempting to reap
                               - 26 -


profits through dividends and the increase in value of his

investment than to that of a promoter who buys and sells

companies as if they were inventory.     We conclude that petitioner

was not in the trade or business of promoting business ventures

in the health care industry.   Thus, petitioners may not deduct as

a business bad debt the $450,000 loss.

     We have considered all other arguments of petitioners, and

they are addressed by the consideration of lack of remaining

carryover losses belonging to the bankruptcy estate or otherwise

lack merit.

                 Additions to Tax and Penalties

     Respondent determined additions to tax for failure to file

tax returns under section 6651(a)(1) and additions to tax for

failure to make timely payment of taxes under section 6651(a)(2).

Respondent also determined additions to tax for negligence under

section 6653(a)(1), additions to tax for negligence under section

6653(a)(1)(A) and (B), and accuracy-related penalties for

negligence or substantial understatements under section 6662(a).

Additions to Tax for Failure To File Timely
a Tax Return and Pay Tax Liability

     Section 6651(a)(1) provides for an addition to tax of

5 percent of the tax required to be shown on the return for each

month or fraction thereof for which there is a failure to file,

not to exceed 25 percent.   Section 6651(a)(2) provides for an
                              - 27 -


addition to tax of 0.5 percent per month up to 25 percent for

failure to pay the amount shown or required to be shown on a

return.   A taxpayer may fail to file and pay a tax and thus be

subject to both section 6651(a)(1) and (2).   See sec. 6651(c)(1).

If that occurs, the amount of the addition to tax under section

6651(a)(1) is reduced by the amount of the addition to tax under

section 6651(a)(2) for any month to which an addition to tax

applies under both paragraphs (1) and (2).    The combined amounts

under paragraphs (1) and (2) cannot exceed 5 percent per month.

See sec. 6651(c)(1).

     To escape the additions to tax for filing late returns,

petitioners have the burden of proving that the failure to file

did not result from willful neglect and that the failure was due

to reasonable cause.   See United States v. Boyle, 469 U.S. 241,

245 (1985).   Reasonable cause requires taxpayers to demonstrate

that they exercised "ordinary business care and prudence" but

nevertheless were "unable to file the return within the

prescribed time."   Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

     Petitioners argue that they used ordinary business care and

prudence because they were acting at all times upon the advice of

a certified public accountant who prepared their returns.

Petitioners also claim that, due to their financial crisis at the
                              - 28 -


time, any failure on their part to file returns or pay tax

liability was unavoidable and excusable.

     From 1982 to 1993, petitioners have shown a pattern of

willful neglect in failing to file their Federal income tax

returns in a timely manner.   Although petitioners employed a paid

tax preparer to prepare their returns, petitioners did not offer

any evidence to show that the paid preparer was the cause of

petitioners’ failing to file and pay the tax shown on their

returns on time.   Also, petitioner is a well-educated individual

who knew or should have known that a tax return was due in a

timely fashion during all of the years in issue.    See United

States v. Boyle, supra at 249-250.

     Petitioners maintain that they lost some of their financial

records when they placed them in storage in 1985.    Although the

loss of records was an involuntary action, it does not relieve

petitioners of their duty to file a timely return.    See Zivnuska

v. Commissioner, 33 T.C. 226, 239-241 (1959).    Therefore, we

sustain the determinations of respondent with respect to the

section 6651(a)(1) and (2) additions to tax.

Negligence Additions to Tax and Penalties

     Respondent determined negligence additions to tax or

penalties for all of the years in issue.    For 1985, section

6653(a)(1) imposes an addition to tax equal to 5 percent of the
                               - 29 -


underpayment if any part of the underpayment is attributable to

negligence.   For 1986 and 1987, section 6653(a)(1)(A) and (B)

replaced former section 6653(a) but is similar in form.     Section

6653(a)(1)(A) imposes an addition to tax equal to 5 percent of

the underpayment if any part of the underpayment is attributable

to negligence.   Section 6653(a)(1)(B) imposes an addition to tax

equal to 50 percent of the interest payable on the portion of the

underpayment attributable to negligence.    For 1988, Congress

replaced former section 6653(a)(1)(A) and (B) with section

6653(a).    Section 6653(a) was similar to former section

6653(a)(1)(A).   Section 6653(a) imposes an addition to tax equal

to 5 percent of the portion of the underpayment attributable to

negligence.   Section 6653(a)(1)(B), however, has no counterpart

for 1988.   For 1989, 1990, 1991, 1992, and 1993, section 6662

replaced former section 6653(a).    Section 6662(a) and (b)(1)

imposes a penalty equal to 20 percent of the portion of the

underpayment that is attributable to negligence or disregard of

rules or regulations.   For purposes of all of these provisions,

negligence is defined as a lack of due care or failure to do what

a reasonable or ordinarily prudent person would do under similar

circumstances.   See Neely v. Commissioner, 85 T.C. 934, 947

(1985).
                              - 30 -


     For the years in issue, petitioners must show that they

acted reasonably and prudently and exercised due care in

reporting their taxes.   See id.   Petitioners assert that their

actions were not negligent, and, therefore, they are not liable

for additions to tax or penalties.     They argue that they relied

on the advice of a certified public accountant in calculating

their tax liability during all years.

     Taxpayers may satisfy their burden of proof as to negligence

by showing that they reasonably relied on the advice of a

competent professional adviser.    See United States v. Boyle,

supra at 250-251; Freytag v. Commissioner, 89 T.C. 849, 888

(1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 869

(1991).   Reliance on professional advice, standing alone, is not

an absolute defense but rather is a factor to be considered.

     Although any reliance by petitioners on the advice of their

paid preparer was unreasonable with respect to the failure to

file a timely return, it was reasonable to rely on the advice of

the paid preparer regarding the amount of tax liability to report

during the years in issue.   The facts of this case created

genuine issues as to whether petitioners are entitled to use NOL

carryovers on their returns for 1985 through 1993.    Due to the

complexity of the bankruptcy issues involved, it was reasonable

for petitioners to rely upon the incorrect advice of their paid
                              - 31 -


preparer, who told them that they could deduct NOL’s for their

investments in and loans made to Pharmacare, The Chamberlin

Corp., or Chamberlin Parenteral.    Therefore, petitioners are not

liable for negligence penalties from 1985 through 1993.

Substantial Understatement

     Taxpayers are liable for penalties for substantial

understatement of tax liability pursuant to section 6662(b)(2) if

the understatement exceeds the greater of 10 percent of the

correct tax or $5,000.   See sec. 6662(d)(1)(A) and (B).   The term

"understatement" is defined as the excess of the amount of tax

required to be shown on the return for the taxable year over the

amount of tax shown on the return for the taxable year.    Sec.

6662(d)(2)(A).   An exception exists where the taxpayer has relied

on invalid advice of a paid tax preparer if, under all

circumstances, such reliance was reasonable and the taxpayer

acted in good faith.   See sec. 1.6662-4(g)(4), Income Tax Regs.

     For the reasons previously discussed under the negligence

analysis above, we conclude that petitioners’ reliance on the tax

liability calculated by their paid tax preparer was reasonable.

Therefore, penalties for substantial understatement shall not

apply.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
