                         T.C. Memo. 1999-345



                      UNITED STATES TAX COURT



  WARREN JACK KIDDER AND BARBARA JEANNE KIDDER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24216-97.               Filed October 18, 1999.



     Warren Jack Kidder and Barbara Jeanne Kidder, pro sese.

     Caroline Tso Chen and Laura B. Belote, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent, by notice of deficiency,

determined income tax deficiencies, an addition to tax, and

penalties, as follows:

                            Addition to Tax       Penalty
     Year   Deficiency      Sec. 6651(a)(1)      Sec. 6662
     1992    $29,725            $1,443             $5,945
     1993     16,401              ---               3,280
                               - 2 -


The issues that remain for our consideration are:   (1) Whether

petitioners are entitled to claim a nonbusiness bad debt

deduction for loans made to petitioner Barbara Jean Kidder’s

(Mrs. Kidder’s) son; and (2) whether petitioners are liable for a

late filing addition to tax for 1992 and/or an accuracy-related

penalty for the 1992 and/or 1993 tax year.

                         FINDINGS OF FACT1

     Petitioners resided in Pebble Beach, California, at the time

their petition was filed in this case.   Petitioners filed a joint

Federal income tax return for their 1992 and 1993 taxable years.

With respect to their 1992 return, petitioners sought two

extensions of time to file, the last of which extended the time

to October 15, 1993.   Petitioners’ 1992 return was executed by

the return preparer on October 11, 1993, and by petitioners on

October 14, 1993.   The date stamp placed on petitioners’ 1992

income tax return, which would normally show when respondent

received the return, is illegible.

     During the taxable years, Mrs. Kidder was employed as a

manager and petitioner Warren J. Kidder (Mr. Kidder) was self-

employed as an appraiser.   Mrs. Kidder began advancing funds to

her son, David Bogue (Mr. Bogue), in 1983.   The advances were to

pay for Mr. Bogue’s personal and business obligations.   Some of


     1
       The stipulation of facts and the attached exhibits are
incorporated by this reference.
                               - 3 -


the advances were paid directly to third parties on Mr. Bogue’s

behalf.   After Mrs. Kidder’s 1987 marriage to Mr. Kidder and

through the years under consideration, petitioners continued to

advance funds to Mr. Bogue.   The advances were not formalized, no

collateral or security was provided, and no written demands for

repayment were made by petitioners.

     On Schedule D of their 1992 income tax return, petitioners

claimed a $145,267 short-term capital loss attributable to a

“Loss on Personal Loan - David Bogue”.   On that same Schedule D,

petitioners reported a long-term capital gain of $83,445, which

left a net short-term capital loss of $61,822, of which $3,000

was claimed for 1992.   The remaining $58,882 short-term capital

loss was carried over to 1993 and applied against an $89,814

long-term capital gain reported for 1993.   Respondent disallowed

the entire $145,267 loss claimed with respect to Mr. Bogue,

explaining that petitioners had “not established that the amount

was a bad debt arising from a true debtor-creditor relationship”.

     On February 28, 1992, Mr. Bogue and his wife (Mrs. Bogue),

engaged in a business known as Garage Doors Unlimited,

voluntarily filed for bankruptcy protection.   In Mr. and Mrs.

Bogue’s initial petition seeking bankruptcy protection,

petitioners were not listed as creditors.   After speaking with

Mr. and Mrs. Bogue’s bankruptcy attorney, petitioners, based on

their estimates of the outstanding advances, decided to file a
                               - 4 -


$75,000 claim in the bankruptcy proceeding.   Ultimately, Mr. and

Mrs. Bogue received a discharge from bankruptcy and relief from

their debts, including petitioners’ claim.

     In the preparation of their 1992 income tax return,

petitioners were advised by their accountant that the claim

against Mr. Bogue could be deducted as a bad debt against

petitioners’ long-term capital gains.   During 1993, when

petitioners were compiling information for the preparation of

their 1992 income tax return, they performed a more thorough

analysis of the total amount that had been advanced to Mr. Bogue

over the years.   Based on their analysis of numerous documents,

petitioners calculated that the total outstanding advances made

to or on behalf of Mr. Bogue was $145,267, and they claimed that

amount as a bad-debt loss on their 1992 return.   Petitioners

produced substantial amounts of documentation reflecting that

they had made numerous advances to and on behalf of Mr. Bogue,

beginning in 1987.

                              OPINION

     We must determine whether the advances made by petitioners

represent loans to Mrs. Kidder’s son, and if so, whether the

loans became worthless in 1992.   In general, section 166(a)2


     2
        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, unless otherwise
indicated.
                                - 5 -


allows an individual to deduct losses sustained from bad debts

that become worthless during the taxable year.     Section 166(d)(1)

restricts the deduction for losses from nonbusiness debts of a

taxpayer other than a corporation by characterizing them as

short-term capital losses.   Only a bona fide debt, arising from a

"debtor-creditor relationship based upon a valid and enforceable

obligation to pay a fixed or determinable sum of money" qualifies

for a deduction under section 166.      Sec. 1.166-1(c), Income Tax

Regs.   Whether a bona fide debtor-creditor relationship exists is

a question of fact to be determined upon a consideration of all

the facts and circumstances.   See Fisher v. Commissioner, 54 T.C.

905, 909 (1970).   Petitioners must show that a bona fide debt

existed between them and Mr. Bogue.     See Rockwell v.

Commissioner, 512 F.2d 882, 885 (9th Cir. 1975), affg. T.C. Memo.

1972-133.

     We also note that intrafamily transactions are subjected to

closer scrutiny.   See Caligiuri v. Commissioner, 549 F.2d 1155,

1157 (8th Cir. 1977), affg. T.C. Memo. 1975-319; see also Perry

v. Commissioner, 92 T.C. 470, 481 (1989), affd. 912 F.2d 1466

(5th Cir. 1990).   It is more likely that a transfer between

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

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

Petitioners may overcome this inference by showing that a real

expectation of repayment existed and that there was an intent to
                               - 6 -


enforce the collection of the indebtedness.   See Estate of Van

Anda v. Commissioner, 12 T.C. 1158, 1162 (1949), affd. 192 F.2d

391 (2d Cir. 1951).

     During some of the period that funds were advanced by

petitioners, Mr. Bogue was involved in a business.   In order for

petitioners to be successful, they would have to show, among

other things, a reasonable expectation, belief, and intention

that petitioners would be repaid as creditors regardless of the

success of the business and that the advances were not

contributions to capital put at risk in the venture.   See Fisher

v. Commissioner, supra at 909-910; Fin Hay Realty Co. v. United

States, 398 F.2d 694, 697 (3d Cir. 1968).

     The record, however, does not generally show that the

advances were made to capitalize Mr. Bogue’s business activity.

Instead, it generally reflects that the advances made to Mr.

Bogue were randomly made without any apparent formality or

expectation of repayment.   A review of the documents offered by

petitioners to support the amount of the advances reveals

payments for medical bills, credit card purchases, apartment

rent, utilities, fines and court costs for motor vehicle

violations, and other personal bills of Mr. and Mrs. Bogue.

Until the time that Mr. and Mrs. Bogue voluntarily petitioned

themselves into bankruptcy, petitioners had not considered the

amount(s) that had been advanced and, after discussions with Mr.
                                - 7 -


Bogue’s bankruptcy attorney during 1992, made an estimate of

$75,000.   In connection with the preparation of petitioners’ 1992

tax return, they conducted a more thorough evaluation and

concluded that the amount advanced to Mr. Bogue was almost double

the amount petitioners had claimed in the bankruptcy proceeding.

     Although petitioners contend that the advances were loans

with the expectation of repayment, the record contradicts such a

conclusion.3   Based on the facts and circumstances in this

record, petitioners’ advances were made with compassion and

generosity.    The record also reveals that Mr. Bogue was in

financial and other types of difficulty throughout the entire

period in which the advances were made.    It was, therefore,

highly unlikely that he would be able to repay the advances.

Although petitioners are generous parents who financially

supported their child in his time of need, the circumstances here

do not show a bona fide debtor-creditor relationship and

entitlement to a bad-debt deduction under section 166.    See Kean

v. Commissioner, 91 T.C. 575 (1988).

     Respondent also determined that petitioners are subject to

an addition to the 1992 tax for late filing of their return and a


     3
       Because we hold that petitioners did not have a debtor-
creditor relationship and that the advances were in the nature of
gifts and were not loans, it is unnecessary to decide whether
petitioners substantiated the amounts claimed for their 1992 and
1993 taxable years.
                                 - 8 -


section 6662 accuracy-related penalty for 1992 and 1993.    As to

the section 6651(a)(1) late filing addition, it applies if

petitioners filed their return late and are unable to show that

their failure to file the return on time was due to reasonable

cause and not due to willful neglect.    See Niedringhaus v.

Commissioner, 99 T.C. 202, 220-221 (1992).

     Before considering whether petitioners have shown reasonable

cause, we consider whether petitioners’ 1992 return was timely

filed.   Respondent determined that petitioners’ 1992 return was

filed 1 month or less after the due date, as extended.    The

parties stipulated a copy of petitioners’ 1992 return that was

filed with respondent.   The parties did not stipulate the date on

which respondent received the return.    The stipulated copy of

petitioners’ 1992 return bears a date stamp that is illegible.

The return was signed by the tax return preparer on October 11,

1993, and by petitioners on October 14, 1993.    Attached to

petitioners’ 1992 return are extensions that extend the time for

filing the 1992 return to October 15, 1993.    Petitioners did not

prove, however, that they mailed (by U.S. mail) their 1992 return

on or before October 15, 1993.    See sec. 7502 (providing that

timely mailing will be considered to be timely filing under

certain circumstances, which includes a showing of a timely U.S.

postmark).

     Petitioners failed to show that they mailed their return or
                               - 9 -


that it was received by the IRS, prior to or on the due date.

Nor have petitioners shown reasonable cause for the late filing.

Because petitioners have not shown respondent’s determination to

be in error, we find that petitioners are liable for the section

6651(a)(1) addition to tax for their 1992 tax year.    See Rule

142(a).

     Respondent also determined that petitioners are subject to a

section 6662 accuracy-related penalty because of negligence or

disregard of rules or regulations.     Section 6662 provides for a

20-percent penalty on the portion of the underpayment to which

section 6662 applies.   Respondent determined that the entire

underpayment is subject to the penalty for the 1992 and 1993

taxable years.   No penalty is imposed with respect to an

understatement as to which the taxpayer acted with reasonable

cause and in good faith.   See sec. 6664(c)(1).

     Petitioners were advised by the bankruptcy attorney that

they could file a claim in bankruptcy for the advances they had

made to Mr. Bogue.   They did so during 1992, and their claim was

discharged during the same year.   Petitioners, who had capital

gains, were advised by their accountant/return preparer that they

were entitled to claim a capital loss for bad debts that they had

claimed and that were discharged in the bankruptcy.    Considering

petitioners’ background, the circumstances of this case, and

petitioners’ reasonable reliance on professional advice, we hold
                             - 10 -


that petitioners acted in good faith and had reasonable cause

and, accordingly, are not liable for the section 6662 penalty for

their 1992 or 1993 taxable year.

     To reflect the foregoing and concessions of the parties,


                                        Decision will be entered

                                   under Rule 155.
