                  T.C. Summary Opinion 2001-49



                     UNITED STATES TAX COURT



                  DON E. KRAMER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12198-99S.                 Filed April 4, 2001.


     George Edward Marifian and Mary E. Lopinot, for petitioner.

     James A. Kutten, for respondent.



     GOLDBERG, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.

     Respondent determined a deficiency in petitioner’s Federal
                               - 2 -

income tax in the amount of $17,223 and an accuracy-related

penalty under section 6662(a) of $3,445 for the 1995 tax year.

     The issues for decision are:   (1) Whether petitioner is

entitled to deduct on his individual income tax return losses

incurred in the operation of a restaurant or if such losses are

deductible by BERM Hospitality Services, Inc., a corporation in

which petitioner was the sole shareholder; and (2) whether

petitioner is liable for an accuracy-related penalty under

section 6662(a) for the year in issue.   Issues relating to

capital losses, self-employment tax, itemized deductions, and

earned income credit are computational and depend upon the

holding in this case.

Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time of filing the

petition, petitioner resided in Marion, Illinois.

     In August 1994, petitioner and Rich Maker (Mr. Maker) formed

BERM Hospitality Services, Inc. (BERM), d.b.a. D.K.’s Steak &

Seafood House, as a corporation under Illinois law.   Petitioner

and Mr. Maker were the initial shareholders of BERM, each owning

50 percent of the stock.   BERM conducted business operating a

restaurant, a cocktail bar and lounge, and banquet facilities at

the Holiday Inn Motel (Holiday Inn), Mt. Vernon, Illinois,
                                - 3 -

beginning in August 1994.

       Petitioner hired a corporate service company to prepare and

file the incorporation documents on behalf of petitioner and Mr.

Maker.    The articles of incorporation of BERM were filed with the

Illinois secretary of state on July 21, 1994, along with an

application to adopt an assumed corporate name, D.K.’s Steak &

Seafood House, on July 29, 1994.    BERM also filed an application

for an employer identification number (EIN) with respondent.      The

Illinois Department of Revenue issued a certificate registering

BERM under the Illinois Use Tax Act, Service Occupation Tax Act,

and Service Use Tax Act.

       Petitioner negotiated BERM’s lease with F.M. (Pat) Sullivan

and Dorothy Jane Sullivan, as Trustee of the Dorothy Sullivan

Trust, dated December 20, 1990, to operate the restaurant,

cocktail bar and lounge, and banquet facilities at the Holiday

Inn.    BERM purchased commercial general liability insurance,

excess liability insurance, and liquor liability insurance for

the period from August 1, 1994, until August 1, 1995; however,

the insurance agreements were canceled at the end of April 1995.

       Initially, petitioner participated minimally in the daily

operations of D.K.’s Steak & Seafood House.    Petitioner

considered himself the investor or “financial supporter” and Mr.

Maker the “operating expert”, handling the day-to-day operation

of the restaurant.    Petitioner was also in charge of securing
                               - 4 -

other investors; however, he was unsuccessful.   Petitioner’s

initial investment in BERM was approximately $50,000.

     Shortly after the restaurant’s opening in August 1994,

petitioner and Mr. Maker had disagreements over Mr. Maker’s

management practices.   At that time, petitioner was winding down

his law practice in Marion, Illinois, about 45 miles away, and

was not involved with BERM full time.   Mr. Maker made numerous

requests to petitioner for additional money, and, after further

inquiry, petitioner found that Mr. Maker “was spending money like

there was no tomorrow.”   Petitioner also noticed a high rate of

employee turnover.   Because of disagreements in management,

petitioner asked Mr. Maker to take a few weeks off while

petitioner decided whether or not to continue with the venture.

     In December 1994, petitioner and Mr. Maker agreed that Mr.

Maker would no longer have any involvement with BERM.   To this

end, on December 12, 1994, Mr. Maker sold his stock in BERM to

petitioner for $5,000, leaving petitioner as the sole shareholder

of BERM.   Although an agreement memorializing this sale was fully

executed by the parties, there are no corporate minutes or

resolutions by BERM with respect to distributions to any

shareholders.   In fact, BERM did not maintain a corporate minute

book.   After petitioner’s initial $50,000 investment in BERM, he

continued to use his own money or money lent to him by friends to
                               - 5 -

maintain BERM’s operations.1

     Petitioner filed, on December 27, 1994, an Illinois Business

Registration with the Illinois Department of Revenue for the

entity Kramer Hospitality Services (Kramer Hospitality), d.b.a.

D.K.’s Steakhouse.   Also on December 27, 1994, petitioner drove

to Springfield to file an application for a new EIN, Form SS-4,

for the entity Kramer Hospitality.     On December 29, 1994, the

Illinois Department of Revenue issued a certificate registering

Kramer Hospitality under the Illinois Use Tax Act, Service

Occupation Tax Act, and Service Use Tax Act.     The record does not

indicate that Illinois sales taxes were reported or remitted by

petitioner or Kramer Hospitality.

     During all times relevant, Kramer Hospitality did not have a

bank account; rather, throughout 1995 petitioner continued to use

BERM’s corporate bank account, in the name of D.K.’s Steak &

Seafood House, to deposit receipts and pay creditors.     Kramer

Hospitality did not purchase liability insurance during 1995.

BERM’s commercial liability insurance agreements were maintained

until April 1995, when BERM ceased operations.     Also, Kramer

Hospitality did not obtain a lease to operate the restaurant,

cocktail bar and lounge, and banquet facilities at the Holiday

Inn, nor did BERM execute a written agreement assigning its


     1
          The record is unclear as to whether these amounts were
loans to the corporation or additional contributions to capital.
                               - 6 -

interest in the written lease to Kramer Hospitality, as required

under section 6.1 of the lease agreement.2

     For the taxable year ending December 31, 1994, BERM filed a

Form 1120, U.S. Corporation Income Tax Return, and a Form 1120X,

Amended U.S. Corporation Income Tax Return.   The 1994 tax return

was filed on September 18, 1995, and the boxes were checked for

initial return and final return.   BERM did not file Form 966,

Corporate Dissolution or Liquidation, with respondent, as

required under section 6043(a).3   BERM also failed to file

articles of corporate dissolution with the Illinois secretary of


     2
          Section 6.1. of the lease agreement, entitled
Assignment and Subleasing, states as follows: “This Lease may be
assigned in whole or in part, and the Project may be subleased in
whole or in part, by the Lessee only with the written consent of
the Lessor”.
     3
          SEC. 6043.   LIQUIDATING, ETC., TRANSACTIONS.

               (a) Corporate Liquidating, Etc., Transactions.--
          Every corporation shall–-

                    (1) Within 30 days after the adoption by the
          corporation of a resolution or plan for the dissolution
          of the corporation or for the liquidation of the whole
          or any part of its capital stock, make a return setting
          forth the terms of such resolution or plan and such
          other information as the Secretary shall by forms or
          regulations prescribe; and

                    (2) When required by the Secretary, make a
          return regarding its distributions in liquidation,
          stating the name and address of, the number and class
          of shares owned by, and the amount paid to, each
          shareholder, or, if the distribution is in property
          other than money, the fair market value (as of the date
          the distribution is made) of the property distributed
          to each shareholder.
                               - 7 -

state.   On December 1, 1995, BERM was administratively dissolved,

by operation of law, for the failure to file the annual report

due July 1, 1995, and pay an annual franchise tax.   See 805 Ill.

Comp. Stat. 5/12.35 (West 1991); 805 Ill. Comp. Stat. 5/12.40

(West 1986).

     Petitioner reported the restaurant’s operating losses of

$54,819 on his individual Schedule C, Profit or Loss From

Business, and abandonment losses4 of $44,184 on Form 4797, Sales

of Business Property, for taxable year 1995.

     In a notice of deficiency respondent determined that

petitioner was not entitled to deduct the business operating and

abandonment losses, resulting in a tax liability of $17,223.

Respondent also determined a penalty of $3,445 pursuant to

section 6662(a).   However, in the notice of deficiency respondent

determined petitioner incurred a capital loss of $141,358 from

his investment in BERM and allowed petitioner a deduction

therefor of $3,000 pursuant to sections 165(g) and 1211(b).

Discussion

     The first issue for decision is whether petitioner operated

the restaurant business at the Holiday Inn as a sole

proprietorship or a corporation during 1995.   Asked differently,



     4
          Petitioner’s reported abandonment losses are with
respect to equipment and leasehold improvements that were
abandoned when the restaurant ceased doing business in April
1995.
                                - 8 -

did BERM distribute its assets to petitioner in a complete

liquidation during 1994 so that from that date forward,

petitioner operated the business as a sole proprietorship?

       Petitioner contends that BERM had completed a de facto

liquidation of its assets to him, as the sole shareholder, in

December 1994.    Petitioner further contends that upon

liquidation he held BERM’s former assets as a sole proprietorship

and continued to run the restaurant located at the Holiday Inn.

Thus, petitioner is entitled to claim the losses on his Schedule

C for the taxable year 1995.

       Respondent contends that BERM was not dissolved until the

State of Illinois administratively dissolved it in July 1995 for

failure to file its annual filings and pay an annual franchise

tax.    Respondent further contends that petitioner failed to show

that a liquidating distribution occurred in 1994; thus, BERM was

the true owner of the assets during 1995 and petitioner is not

entitled to personally deduct the operational and abandonment

losses.

       Whether a corporation has liquidated is a question of fact.

See Wood v. Commissioner, 27 B.T.A. 162, 167 (1932); Murphy v.

Commissioner, T.C. Memo. 1996-59.    This Court has applied a

three-pronged test in making a factual determination that a de

facto liquidation had occurred for Federal tax purposes:    (1)

Whether there is a manifest intention to liquidate; (2) whether
                               - 9 -

there is a continuing purpose to terminate corporate affairs and

dissolve the corporation; and (3) whether the corporation’s

activities are directed and confined to that purpose.    See Estate

of Maguire v. Commissioner, 50 T.C. 130, 140 (1968).

      Although the term “complete liquidation” is not defined in

the Code or the regulations to section 331, we have noted in

Olmsted v. Commissioner, T.C. Memo. 1984-381, that the

regulations under section 332 offer a definition of “complete

liquidation” that applies equally to section 331:

      A status of liquidation exists when the corporation
      ceases to be a going concern and its activities are
      merely for the purpose of winding up its affairs,
      paying its debts and distributing any remaining balance
      to its shareholders. A liquidation may be completed
      prior to the actual dissolution of the liquidating
      corporation. However, legal dissolution of the
      corporation is not required.*** [Sec. 1.332-2(c),
      Income Tax Regs.]

      Under Illinois law, a corporation is prohibited from making

a distribution if, after giving it effect, the corporation would

be insolvent.   See 805 Ill. Comp. Stat. 5/9.10(c)(1) (West 1984).

A   corporation is insolvent when it is unable to pay its debts as

they become due in the usual course of its business.    See id.

5/1.80(m).

      Petitioner relies on Rendina v. Commissioner, T.C. Memo.

1996-392, to support his contention that BERM had de facto

liquidated during December 1994 for tax purposes.   However, after

reviewing Rendina, we find that it is distinguishable.    In
                               - 10 -

Rendina, the Court found that the intent to liquidate was

          apparent from the sales of WSAI’s assets, its
          cessation of business, and the agreement of
          petitioner and Ackerman that WSAI would
          distribute the last two condominium units to
          petitioner, in consideration of petitioner’s
          assumption of the corporation’s liabilities
          to its lenders and his recovery of his
          investment out of the balance. With that
          final distribution, WSAI held title to no
          further assets of any substantial
          consequence.***

Unlike the facts in Rendina, the record does not clearly show an

intent to liquidate.   There is no evidence of a written or oral

agreement to liquidate BERM after Mr. Maker sold his shares in

the corporation; no management agreement showing petitioner’s

obligation to indemnify the corporation of any loss at the end of

the year; no partnership agreement showing a new entity to carry

on the business of BERM; no books and records showing daily

accounts or value of assets and liabilities; and no canceled

checks or loan agreements establishing the amounts of loans

petitioner personally made to BERM or any other entity.

     In fact, there is no evidence that BERM ceased doing

business at the end of 1994.   On the contrary, petitioner

continued to enjoy the benefits of BERM’s corporate form

throughout 1995.   Particularly, petitioner continued to use

BERM’s checking account to deposit receipts, pay expenses and

maintain the necessary cash-flow for the business.   Petitioner

also enjoyed the benefits of the insurance contracts and lease
                               - 11 -

agreement entered into by BERM.   There was no attempt to

renegotiate these contracts on behalf of Kramer Hospitality.5

See Haley Bros. Constr. Corp. v. Commissioner, 87 T.C. 498, 515-

516 (1986).

     Petitioner has failed to show that a liquidating

distribution of BERM’s assets occurred in 1994.   Petitioner has

not offered any corroborating evidence, besides his testimony, to

establish that any distribution, liquidating or nonliquidating,

occurred in 1994.   It is well settled that we are not required to

accept a taxpayer’s self-serving testimony in the absence of

corroborating evidence.    See Niedringhaus v. Commissioner, 99

T.C. 202, 212 (1992).

     Assuming arguendo, that petitioner did attempt to distribute

BERM’s assets to himself, Illinois law prohibits such a

distribution if the corporation is insolvent.   See 805 Ill. Comp.

Stat. 5/9.10(c)(1).   After reviewing BERM’s bank accounts,

corporate tax returns for 1994, Forms 1120 and 1120X, and

petitioner’s testimony, we find that BERM could not make a

liquidating distribution, as petitioner suggests, because it was

insolvent at that time.6


     5
          Petitioner testified that he conferred with his agent
about the insurance contracts and it was “kind of a calculated
decision” to maintain BERM’s insurance due to the insufficiency
of his personal cash flow.
     6
          According to BERM’s Form 1120, U.S. Corporation Income
                                                   (continued...)
                              - 12 -

     On the basis of the complete record, we hold that BERM did

not distribute its assets to petitioner during 1994; therefore,

petitioner is not entitled to deduct the operational or

abandonment losses claimed on his Schedule C.     Accordingly,

respondent is sustained on this issue.

Section 6662(a)

     The last issue for decision is whether petitioner is liable

for an accuracy-related penalty pursuant to section 6662(a).

Section 6662(a) imposes a penalty of 20 percent of the portion of

the underpayment which is attributable to negligence or disregard

of rules or regulations.   See sec. 6662(b)(1).   Negligence is the

“‘lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.’”

Neely v. Commissioner, 85 T.C. 934, 947 (1985) (quoting Marcello

v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. 43 T.C.



     6
      (...continued)
Tax Return, BERM was insolvent at the close of 1994. However,
BERM’s Form 1120X, Amended U.S. Corporation Income Tax Return,
reports an adjustment of $102,533, as “Management Fees Received”
in 1994, thus transforming BERM into a solvent corporation at the
close of 1994. At trial, petitioner testified that he did not
invest $102,533, but rather, he relieved the corporation of
$102,533 in loans he had previously made to the corporation in
1994. The record does not indicate any evidence of the amount of
loans petitioner made to BERM other than petitioner’s testimony
and the amended return. Also, the record contains no management
agreements which petitioner testified required him to indemnify
the corporation for any loss at the end of the year. On the
basis of the above, we do not accept petitioner’s self-serving
testimony in the absence of corroborating evidence. See
Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992).
                              - 13 -

168 (1964) and T.C. Memo. 1964-299).    Negligence also includes

any failure by the taxpayer to keep adequate books and records or

to substantiate items properly.   See sec. 1.6662-3(b)(1), Income

Tax Regs.   The term “disregard” includes any careless, reckless,

or intentional disregard.   Sec. 6662(c).   No penalty shall be

imposed if it is shown that there was reasonable cause for the

underpayment and the taxpayer acted in good faith with respect to

the underpayment.   See sec. 6664(c).   The determination of

whether a taxpayer acted with reasonable cause and good faith

within the meaning of section 6662(c) is made case-by-case,

taking into account all the pertinent facts and circumstances.

See sec. 1.6664-4(b)(1), Income Tax Regs.

     We find petitioner’s testimony conflicting,7 and without

corroborating evidence, self-serving.    See Niedringhaus v.

Commissioner, supra at 212.   At trial, petitioner failed to

establish that he acted in good faith with respect to the claimed

losses.   Petitioner, a practicing lawyer during the year in

issue, failed to make inquiry and obtain advice as to the

necessary steps to dissolve a corporate entity.    He also failed



     7
          For instance, although petitioner testified that he
obtained a new sales tax number for Kramer Hospitality Services
as a sole proprietorship, the record shows that all relevant
documents (i.e., Illinois Business Registration, Form SS-4,
application for new EIN, Illinois Department of Revenue Sale and
Use Tax Return, and Payroll Transfers New Subscriber Information
Form) indicate that Kramer Hospitality was formed as a
partnership, rather than a sole proprietorship.
                             - 14 -

to maintain adequate books and records and to act with ordinary

business care and prudence in complying with the Federal income

tax requirements.

     On the basis of the entire record, we find that petitioner

was negligent and hold that petitioner is liable for an accuracy-

related penalty under section 6662(a) for the 1995 tax year.

     We have considered all arguments made by the parties, and,

to the extent not discussed above, conclude they are irrelevant

or without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                        Decision will be entered

                                   for respondent.
